PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R.

PULIDO, petitioners, vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE
PHILIPPINES, respondents.
DECISION
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No. 27861,
[1]
[2]
promulgated on April 23, 1992, affirming in toto the decision of the Regional Trial Court of Makati to award
respondent banks deficiency claim, arising from a loan secured by chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over
PAMECAs properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole
value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for
a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of
[3]
P4,366,332.46 with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private
petitioners herein, as solidary debtors with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we
reproduce as follows:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1)
sum of P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per
annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO
[4]
ORDERED.
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in not holding that
the public auction sale of petitioner PAMECAs chattels were tainted with fraud, as the chattels of the said
petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence
unconscionable and inequitable, and therefore null and void.
2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil
Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract
of adhesion.
3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R.
Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the
loan is only for the corporations benefit.
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank
bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time
of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to
[5]
petitioners, this is evident from an inventory dated March 31, 1980 , which valued the properties at
[6]
P2,518,621.00, in accordance with the terms of the chattel mortgage contract between the parties that required
that the inventories be maintained at a level no less than P2 million. Petitioners argue that respondent banks

act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a
public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes
sufficient ground for the annulment of the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in
fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners
[7]
only when the case was brought to the Court of Appeals. The Court of Appeals, in turn, disregarded these
documents for petitioners failure to present them in evidence, or to even allude to them in their testimonies
[8]
before the lower court. Instead, respondent court declared that it is not at all unlikely for the chattels to have
[9]
sufficiently deteriorated as to have fetched such a low price at the time of the auction sale. Neither did
respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole
bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus
[10]
giving rise to the presumption of regularity in the performance of public duties.
Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners,
officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained
[11]
from respondent bank, contrary to the doctrine of separate and distinct corporate personality. Private
petitioners contend that they became signatories to the promissory note only as a matter of practice by the
respondent bank, that the promissory note was in the nature of a contract of adhesion, and that the loan was for
[12]
the benefit of the corporation, PAMECA, alone.
[13]
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 and
[14]
[15]
2115 of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.
Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel
[16]
mortgage. In the leading case of Ablaza vs. Ignacio , the lower court dismissed the complaint for collection of
deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code
on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage
Law. It was the lower courts opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the
creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less than the
amount of the principal obligation, will apply.
This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law
regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article
2115 in relation to Article 2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
x x x
The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the
same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record
the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as
provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of
Deeds for registering the officers return shall be taxed as a part of the costs of sale, which the officer shall pay to
the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for
each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such
sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment
of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons
holding under him on demand. (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in
excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in

the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co.
Ablaza vs. Ignacio, supra:

[17]

, cited in

While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a conditional sale, it further
provides that it is a conditional sale of personal property as security for the payment of a debt, or for the
performance of some other obligation specified therein. The lower court overlooked the fact that the chattels
included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of
payment.
The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage,
given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be
entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the
indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No.
1508. There seems to be no reason supporting that theory under the provision of the law. The value of the
chattels changes greatly from time to time, and sometimes very rapidly. If, for example, the chattels should
greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and
if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the
deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the
condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel
mortgages, have said, that in case of a sale under a foreclosure of a chattel mortgage, there is no question that
the mortgagee or creditor may maintain an action for the deficiency, if any should occur. And the fact that Act No.
1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value
of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring
good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency
in the debt.
[18]

We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As
correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property
the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action
against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel
mortgage on the thing sold, should the vendees failure to pay cover two or more installments, this provision is
specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be to expand the application of the
provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the
Chattel Mortgage Law. Equity, which has been aptly described as justice outside legality, is applied only in the
[19]
absence of, and never against, statutory law or judicial rules of procedure.
We are also unable to find merit in petitioners submission that the public auction sale is void on grounds of
fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court
of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the Open-End Mortgage on
Inventory and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the
rule that parties may not bring on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are
not convinced that they effectively prove that the mortgaged properties had a market value of at
leastP2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract
only indicates the obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but
does not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April
17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being
an accurate estimate of the market value of the properties at the time of the foreclosure sale four years
thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as
evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners allegation of
inadequacy of price.

Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the
public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious
[20]
allegation that requires full and convincing evidence, and may not be inferred from the lone circumstance that it
was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners evidence
in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with petitioner corporation in the loan. As
found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the
solidary nature of private petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized
and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan,
Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner
Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND
EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per
cent (3%) per annum over DBPs borrowing rate for these funds. Before the date of maturity, we hereby bind
ourselves, jointly and severally, to make partial payments as follows:
xxx
In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances xxx
xxx
We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof
in arrears as follows:
xxx
"In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes xxx
xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign
currency borrowings from where the loan shall be drawn xxx
xxx
In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other
amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if,
for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to
entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorneys fees as provided for in
the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of
the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if
[21]
any. (Emphasis supplied)
The promissory note was signed by private petitioners in the following manner:
PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

[22]
(Sgd) VICTORIA V. TEVES
From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner
PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for
the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23,
1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

[G.R. No. 150673. February 28, 2003]

SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES, petitioners, vs. ICC LEASING &
FINANCING CORPORATION,respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of
[1]
[2]
the Decision of the Court of Appeals in CA-G.R. No. 65126 reversing on appeal the Decision of Branch 142 of
the Regional Trial Court of Makati City in Civil Case No. 97-816.

The Antecedents
In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to acquire five new buses from
the Diamond Motors Corporation for the price of P10,873,582.00. However, Superlines lacked financial resources
for the purpose. By virtue of a board resolution, Superlines authorized its President and General Manager,
Manolet Lavides, a graduate of the Ateneo de Manila School of Law and a businessman for twenty years, to look
for and negotiate with a financing corporation for a loan for the purchase of said buses.
Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity) through the latters Assistant
Vice-President for Operations Aida F. Albano, for a financial scheme for the planned purchase. ICC agreed to
finance the purchase of the new buses via a loan and proposed a three-year term for the payment thereof at a
fixed interest rate of 22% per annum. The new buses to be purchased were to be used by Superlines as security
for the loan. ICC required Superlines to submit certificates of registration of the said buses under the name of
Superlines before the appropriate document was executed by the parties and their transactions
consummated. On October 19, 1995, Diamond Motors Corporation sold to Superlines five new buses under
[3]
Vehicle Invoice Nos. 9225 to 9229. Superlines, through Lavides, acknowledged receipt of the buses.
On November 22, 1995, the vehicle invoices were filed with the Land Transportation Office which then issued
[4]
certificates of registration covering the five buses under the name of Superlines. With the buses now registered

under its name, Superlines, through Lavides, executed two documents, namely: a deed of chattel mortgage over
[5]
the said buses as security for the purchase price of the buses in the amount of P13,114,287.00 loaned by ICC to
Superlines, which deed was annotated on the face of said certificates of registration, and a promissory note in
favor of ICC binding and obliging itself to pay to the latter the amount of P10,873,582.00 in monthly installments
of P415,290.00, the first installment to start on December 23, 1995, with interest thereon at the rate of 22% per
[6]
annum until full payment of said amount in favor of Superlines and ICC covenanted in said deed that:
Effective upon the breach of any condition of this mortgage, and in case of loss or damage of the mortgaged
property/ies and in addition to the remedies herein stipulated, the MORTGAGEE is hereby appointed attorney-infact of the MORTGAGOR with full power and authority, by the use of force if necessary, to take actual possession
of the mortgaged property/ies without the necessity of any judicial order or any other permission or power, to
remove, sell or dispose of the mortgaged property/ies, and collect rents therefor, to execute bill of sale, lease or
agreements that may be deemed convenient; to make repairs or improvements in the mortgaged property/ies and
pay the same and perform any other act which the MORTGAGEE may deem convenient for the proper
administration of the mortgaged property/ies; and to file, prove, justify, prosecute, compromise or settle
insurance claims with the insurance company, without the participation of the MORTGAGOR, under such terms
and conditions as the Mortgagee as attorney-in-fact may consider fair and reasonable. The payment of any
expenses advanced by the MORTGAGEE or its assigns in connection with the purpose indicated herein is also
guaranteed by this mortgage. Any amount received from the sale, disposal or administration abovementioned
may be executed by the MORTGAGEE by virtue of this power and applied to the satisfaction of the obligations
hereby secured, which act is hereby ratified.
The MORTGAGEE shall have the option of selling the property/ies either at public or private sale at the
municipality or at the capital of the province where it may be situated at the time; or at any municipality where the
MORTGAGEE may have a branch, office, or at Metro Manila, the MORTGAGOR hereby waiving all rights to any
notice of such sale.
The MORTGAGOR hereby expressly waives the term of thirty (30) days or any other term granted or which may
hereafter be granted him/it by law as the period which must elapse before the MORTGAGEE or its assigns shall be
entitled to foreclose this mortgage, it being expressly understood and agreed that the MORTGAGEE may foreclose
this mortgage at any time after the breach of any condition hereof.
It is further agreed that in case of the sale at public auction under foreclosure proceedings of the property/ies
herein mortgaged, or of any part thereof, the MORTGAGEE shall be entitled to bid for the properties so sold, or for
any part thereof, to buy the same, or any part thereof, and to have the amount of his/its bid applied to the
payment of the obligations secured by this mortgage without requiring payment in cash of the amount of such bid.
The remedies of the MORTGAGEE under the powers hereby conferred upon him/it shall be and are in addition to
and cumulative with such right of action as the said MORTGAGEE or the assigns may have in accordance with the
[7]
present or any future laws of the Philippines.
Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of ICC the
[8]
amount of P13,114,285.00. ICC drew and delivered to Superlines Metrobank Check No. 0661909113, dated
[9]
November 23, 1995, payable to the account of Superlines in the amount of P10,873,582.00, representing the net
[10]
proceeds of the loan. The latter acknowledged receipt of the check in Cash Voucher No. 0.0769.
Superlines
remitted the said check to Diamond Motors Corporation in full payment of the purchase price of the new buses.
After paying only seven monthly amortizations for the period of December 1995 to June 1996, Superlines
[11]
defaulted in the payment of its obligation to ICC.
On April 2, 1997, ICC wrote Superlines demanding full
[12]
payment of its outstanding obligation, which as of March 31, 1997 amounted to P12,606,020.55.
However,
Superlines failed to heed said demand.
[13]
ICC filed a complaint for collection of sum of money with prayer for a writ of replevin on April 21, 1997
with Branch 142 of the Regional Trial Court of Makati City against Superlines and Lavides. The case was entitled
ICC Leasing & Finance Corporation vs. Superlines Transportation Co., Inc., et al. and docketed as Civil Case No.
97-816. ICC alleged, by way of alternative cause of action, that:
....

....

...

13. In the event that the Plaintiff fails to locate and/or seize the above-described mortgaged vehicles from
Defendant, its agents and/or assigns, or any such person other than said Defendant or its representatives,
Defendant is obligated to pay Plaintiff the sum of P12,072,895.59, and an amount equivalent to 5% of the total
amount due from Defendant as and for attorneys fees, plus expenses of collection, the costs of suit and cost of
Replevin Bond.
ICC prayed that after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that:
1.
A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his deputies, to seize from Defendant,
its agents and/or assigns, or any such person other than said Defendant or its representatives in possession
thereof at present, the above-described vehicles wherever they may be found, to take and keep the same in
custody and, to dispose of them in accordance with Section 6, Rule 60 of the Revised Rules of Court.
2.
Judgment be rendered in favor of the Plaintiff and against the Defendant, as follows:
a) Declaring that Plaintiff is entitled to the possession of the subject properties in accordance with the
terms and conditions of the Chattel Mortgage;
b) Ordering Defendant, in case the amount realized from the sale of the mortgaged properties shall be
insufficient to cover its total indebtedness, to pay the Plaintiff the deficiency;
c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit, including the costs of
the Replevin Bond, plus the stipulated attorneys fees.
As to the

ALTERNATIVE CAUSE OF ACTION

Ordering Defendants to pay the outstanding principal balance of P12,072,895.59, to pay the costs of suit, expenses
of litigation and the costs of the Replevin Bond, plus an amount equivalent to 5% of the total amount due as and
for attorneys fees.
[14]

In the meantime, the trial court issued a writ of seizure for the five mortgaged buses.
On May 29, 1997,
the sheriff took possession of the five buses in compliance with the writ of seizure issued by the trial
[15]
court.
Thereafter, ICC instituted extra-judicial foreclosure proceedings over the subject buses. An auction sale
was held on July 2, 1997. ICC offered a bid of P7,200,000.00 for the motor vehicles and was declared the winning
bidder, resulting in a deficiency of P5,406,029.55. In addition, ICC incurred necessary expenses in the amount
of P920,524.62. Superlines thus still owed ICC the amount of P6,326,556.17.
In their Answer with Counterclaim, Superlines and Lavides asserted that the real agreement of the parties
was one of financing a sale of personal property, the prices for which shall be payable on installments. Relying on
Article 1484(3) of the Civil Code, Superlines and Lavides claimed that since the chattel mortgage on subject buses
was already foreclosed by ICC, the latter had no further action against Superlines and Lavides for the unpaid
balance of the price. They interposed compulsory damages in the total amount of P750,000.00 excluding costs of
suit.
Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer of ICC, testified that the
transaction forged by ICC and Superlines was an amortized commercial loan and not a consumer loan, because
under the latter transaction, ICC should have paid the price of the purchase of its customers (Superlines) directly to
the suppliers. However, ICC did not do business directly with Diamond Motors Corporation; it transacted directly
with Superlines. ICC remitted the purchase price of the buses directly to Superlines and not to Diamond Motors
Corporation. ICC had no contract with Diamond Motors Corporation.
On the other hand, Lavides testified that he and ICCs Assistant Vice-President for Operations Aida Albano
agreed on a consumer loan for the financing of the purchase of the buses, with ICC as the vendor, and Superlines

as the vendee, of said buses; and that ICC had a special arrangement with Diamond Motors Corporation on the
purchase by Superlines of the buses.
On June 1, 1999, the trial court rendered a decision ordering the dismissal of the case and for ICC to pay
damages and litigation expenses to Superlines and Lavides, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered DISMISSING the instant complaint and
ORDERING plaintiff to pay defendants the following:
1.
2.
3.
4.

The sum of P150,000.00 as and for attorneys fees;

The sum of P300,000.00 as moderate damages;
The sum of P50,000.00 as litigation expenses and
The costs of suit.

SO ORDERED.

[16]

The trial court found that, as testified to by Lavides, ICC and Superlines forged a consumer loan agreement
and not an amortized commercial loan. It further declared that, as testified to by Lavides, there was a special
arrangement for the purchase by ICC of said buses. The trial court finally stated that Superlines purchased the
buses from ICC, the purchase price therefor payable in monthly installments. ICC appealed the trial courts
decision to the Court of Appeals. On July 30, 2001, the appellate court rendered a decision reversing the decision
of the RTC and ordering Superlines and Lavides to pay the deficiency claim of ICC. The decretal portion
thereof reads:
In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to the deficiency claim
of P5,376,543.96 (Exh. F-1, p. 155 Record), plus costs of P71,807.22 for the Replevin Bond (Exh. H, p. 156,
Record) and attorneys fees of P508,000.00 (Exh. G, p. 156, Record).
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new one is rendered ordering defendants to
pay jointly and severally the sum of P5,956,351.18 to the plaintiff.
[17]
SO ORDERED.
The Court of Appeals stated that ICC and Superlines entered into an amortized commercial loan agreement
with ICC as creditor-mortgagee and Superlines as debtor-mortgagor, and ordered Superlines and Lavides to pay to
[18]
ICC jointly and severally the sum of P5,956,351.18 as deficiency.
It further declared that it was Diamond Motors Corporation and not ICC which sold the subject buses to
Superlines. It held that no evidence had been presented by Superlines to show that ICC bought the said buses
from Diamond Motors Corporation under a special arrangement and that ICC sold the buses to Superlines. The
appellate court also ruled that Article 1484(3) is applicable only where there is vendor-vendee relationship
between the parties and since ICC did not sell the buses to Superlines, the latter cannot invoke said law.
Hence, this petition.
Petitioners contend that the appellate court committed serious errors of law and/or grave abuse of discretion
amounting to excess or lack of jurisdiction:
1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the instant transaction between
the parties, and in holding that said transaction was an amortized commercial loan, the same
being patently contrary to the unrebutted evidence as well as the admissions of the respondents
sole witness that the parties may verbally agree as regards the financial scheme applied for and
that the chattel mortgage, promissory note and other documents executed in the case of a
commercial loan are no different from those documents executed in the case of a consumer
loan.
2. In concluding that the respondent is in any event entitled to deficiency judgment as it is deemed to
have chosen the remedy of exacting fulfillment of the obligation under paragraph (1) of Article 1484
of the Civil Code, the same being patently contrary to incontestable fact that what respondent

availed of in the instant case is foreclosure of the chattel mortgage and not the alternative prayer
[19]
contained in the relief portion of its complaint.
Anent the first assignment of error, petitioners aver that the findings of the Court of Appeals that the
transaction forged by petitioners and private respondent was an amortized commercial loan and not a consumer
loan are belied by the evidence on record, more specifically the testimony of Lavides and that of respondents
witness Leonardo Serrano, Jr. The Promissory Note and Chattel Mortgage executed by petitioner Superlines and
the Continuing Guaranty executed by both petitioners are not conclusive of the nature of the transaction
concluded by them, private respondent and Diamond Motors Corporation. Petitioners further claim that the
appellate court also ignored the unrebutted testimony of Lavides that respondent and Diamond Motors
Corporation forged a special arrangement under which the latter will expedite the issuance of the certificates of
registration over the buses under the name of Superlines. Petitioners also argue that the word vendee in Article
1484(3) of the New Civil Code is used in its generic term, and hence, it may mean an assignee or a mortgagee such
as respondent.
For its part, respondent contends that the findings and conclusions of the Court of Appeals were buttressed
by the documentary and testimonial evidence on record which should prevail over those of the trial court:
We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is applicable to the instant
case. DIAMOND is the seller of the five units of buses and not the plaintiff. No convincing evidence, except the
self-serving testimony of defendant Manolet Lavides, was presented to prove that there was an internal
arrangement between the plaintiff, as financing agent, and Diamond, as seller of the buses. In fact, defendant
Lavides admitted under oath that DIAMOND and plaintiff did not enter into transaction over the sale of the buses
(TSN, February 26, 1999, p. 12). The conclusion of the lower court that the parties entered into a financing scheme
covered by Article 1484 (3) of the New Civil Code is therefore unsubstantiated.
The evidence shows that the transaction between the parties was an amortized commercial loan to be paid in
installments. Defendants failed to prove that a special arrangement regarding the nature of the transaction was
agreed upon between the plaintiff and the defendants. Aida Albano, plaintiffs employee who allegedly agreed
with the request of defendant Manolet Lavides for a special arrangement, was not presented. It bears
emphasizing that whoever alleges fraud or mistake affecting a transaction must substantiate his allegation, since it
is presumed that a person takes ordinary care of his concerns and private transactions have been fair and regular
(Mangahas vs. CA, 304 SCRA 375). If indeed defendant Manolet Lavides, a law graduate from a prestigious law
school (TSN, February 26, 1999, p. 3) and a successful businessman for twenty (20) years ...., who admits to having
meticulously examined the subject documents ... intended a financing scheme covered by Art. 1484 of the New
[20]
Civil Code, he should have objected to the contents of the documents and incorporated therein his true intent.
At the core of petitioners case is their claim that the findings of facts of the Court of Appeals and its
conclusions anchored thereon are belied by the evidence on record in contrast to those of the trial court. It bears
stressing, however, that in a petition for review on certiorari, only questions of law may be raised in said
petition. The jurisdiction of this Court in cases brought to it from the Court of Appeals is confined to reviewing and
reversing the errors of law ascribed to it, findings of facts being conclusive on this Court. The Court is not tasked to
[21]
calibrate and assess the probative weight of evidence adduced by the parties during trial all over again.
In
those instances where the findings of facts of the trial court and its conclusions anchored on said findings are
inconsistent with those of the Court of Appeals, this Court does not automatically delve into the record to
determine which of the discordant findings and conclusions should prevail and to resolve the disputed facts for
itself. This Court is tasked to merely determine which of the findings of the two tribunals are conformable to the
[22]
facts at hand.
So long as the findings of facts of the Court of Appeals are consistent with or are not palpably
contrary to the evidence on record, this Court shall decline to embark on a review on the probative weight of the
[23]
[24]
evidence of the parties. Indeed, in Tan vs. Lim,
this Court, citing its ruling in Hermo vs. Court of Appeals,
held
that it is the findings of the Court of Appeals and not those of the trial court which are final and conclusive on this
Court. The rule is not without exception. This Court may review the findings of facts of the Court of Appeals and
its conclusions based thereon if the inference made by the appellate court from its findings of facts is manifestly
erroneous, absurd or impossible, or when the judgment of the said court is premised on a misappreciation of
[25]
facts.

In this case, the findings of facts of the Court of Appeals and its conclusions anchored thereon are in terra
firma, buttressed as they are by the evidence on record. The Court of Appeals correctly ruled that the findings of
facts, deductions, and conclusions of the trial court are not warranted by the evidence on record.
Petitioners failed to adduce a preponderance of evidence to prove that respondents and Diamond Motors
Corporation entered into a special arrangement relative to the issuance of certificates of registration over the
buses under the name of petitioner Superlines. Petitioners were also unable to prove that respondent purchased
from Diamond Motors Corporation the new buses. In contrast, the vehicle invoices of Diamond Motors
[26]
Corporation irrefragably show that it sold the said buses to petitioner Superlines. The net proceeds of the loan
were remitted by respondent to petitioner Superlines and the latter remitted the same to Diamond Motors
Corporation in payment of the purchase price of the buses. In fine, respondent and Diamond Motors Corporation
had no direct business transactions relative to the purchase of the buses and the payment of the purchase price
thereof.
As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the Ateneo de Manila
University School of Law. He had been in business for twenty years or so. It is incredible that petitioner Superlines
through petitioner Lavides never required respondent and Diamond Motors Corporation to execute a deed
evidencing their special agreement or arrangement if indeed they had one.
The trial court indulged in a non sequitur when it quoted part of the testimony of Leonardo Serrano, Jr. out
of context and used it as anchor for its finding that respondent and Diamond Motors Corporation forged a special
arrangement. The testimony of Leonardo Serrano, Jr. is as follows:
ATTY. FABIE
Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to the question of Atty.
Agcaoili, the question is this and I quote:
Q Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what other
circumstances or events transpired in connection with the evaluation or approval of the loan of the
defendants Superlines?
And your answer was this:
A The regular paper requirements, meaning the way the loan proposal and the approval report
inclusive of credit showing credit checking was presented for approval by our Executive
Committee.
ATTY. FABIE
What is this regular papers requirement you are referring to, Mr. Witness?
WITNESS
A Those papers that are presented to the Executive Committee, Sir.
ATTY. FABIE
Q Papers that are presented to the Executive Committee?
WITNESS
A This will include evaluation report of the corporations financial statement credit checking from his
creditors and this will include evidence of the collaterals being presented for the loan, Sir.
ATTY. FABIE
Q In this particular case of Superlines Transportation Company, those requirements were complied
with, Mr. Witness?
WITNESS
A Yes, Sir.
ATTY. FABIE
Q By way, in consumer loan, these papers are practically the same, am I correct, Mr. Witness?
WITNESS
A In consumer loan, sometimes we have additional requirements, Sir.
ATTY. FABIE
Q What is that, Mr. Witness?
WITNESS
A Because they are individual applicants, we require them to submit their certificate of employment
with the corresponding amount of their salary, Sir.

ATTY. FABIE
Q You mean to say that consumer loan are specifically for individual and entities are not supposed to
apply in consumer loans, is that what you mean, Mr. Witness?
WITNESS
A As a matter of practice, we classify them as consumer loan, loans for individuals, Sir.
ATTY. FABIE
Q For individuals only?
WITNESS
A Yes, sir.
ATTY. FABIE
Q So, you did not extend consumer loans to corporations other than individuals, Mr. Witness?
WITNESS
A For companies or corporations, we classified them as commercial loan already, Sir.
ATTY. FABIE
Q Although the scheme adopted on both loans are the same or would be the same, Mr. Witness?
WITNESS
A In consumer loan, Sir, usually it is for purposes of buying a car or a motor vehicle, Sir.
ATTY. FABIE
Q That is the normal practice, Mr. Witness?
WITNESS
A Yes, Sir. That is the normal practice.
ATTY. FABIE
Q But arrangement can be made by your company regarding the nature of the transaction, am I
correct? Specific arrangement?
WITNESS
A What do you mean?
ATTY. FABIE
Q That you may depart from certain requirements between your company and the applicant? Mr.
Witness?
WITNESS
A When the company ......
ATTY. FABIE
Q In special cases?
WITNESS
A When the company is presented with a loan proposal, we require them to submit documents
depending on the loan proposal, Sir.
ATTY. FABIE
Q Now, did Superlines Transportation Company or Mr. Lavides present to you a loan proposal and
where is that now, Mr. Witness?
WITNESS
A The loan proposal of Mr. Lavides, Mr. Witness?
ATTY. FABIE
Q Yes, in writing?
WITNESS
A No, not in writing?
ATTY. FABIE
Q No written loan proposal, Mr. Witness?
WITNESS
A It was verbally told to us the purpose of his loan, Sir.
ATTY. FABIE
Q Now, is that normal in your corporation, Mr. Witness?
WITNESS
A In the practice?

ATTY. FABIE
Q I am asking you whether that is normal in your corporation that you do not require any written loan
proposal from the applicants, Mr. Witness?
WITNESS
A We do not, Sir.
ATTY. FABIE
Q Even in consumer loan, Mr. Witness?
WITNESS
A We only require when the consumer or individual is applying. Then we require him to submit the
application form.
ATTY. FABIE
Q So, there is an application form, Mr. Witness?
WITNESS
A For consumer loan, yes.
ATTY. FABIE
Q And in commercial loan, you dont require the applicant to submit a written loan proposal, Mr.
Witness?
WITNESS
A As a matter of (loan) marketing consideration, anybody who wants ....
ATTY. FABIE
Q I am asking you whether that is normal in your operation like Superlines?
WITNESS
A This .....
ATTY. AGCAOILI
Already answered, Your Honor.
ATTY. FABIE
I am asking him now to specific, Your Honor.
COURT
Witness may answer.
WITNESS
A That is not normal. Sorry. That is normal. We do not require them. That is the regular practice.
ATTY. FABIE
Q And why not?
ATTY. AGCAOILI
Objection, misleading. It was already answered that that was the normal practice, Your Honor.
ATTY. FABIE
Q Why do you not require the applicants to submit papers or written loan proposal, Mr. Witness?
WITNESS
A Because in our business marketing consideration, we finance companies after evaluation of a
particular account and if this account is credit worthy, we sometimes do away with it, Sir.
ATTY. FABIE
Q So, what is normal is that you ask for written loan proposal and what is sometimes not normal is
that you do not require them to submit any loan proposal, Mr. Witness?
WITNESS
A We....
ATTY. AGCAOILI
I think counsel is already (arguing) with the witness, Your Honor. The question has been asked several
times and the witness consistently answered in the same fashion.
ATTY. FABIE
The Court will know ....
COURT

The answer he gave was that with marketing considerations, we do not require papers in consumer loan
because the client is credit worthy risk. Sometimes we do not require submission of papers
anymore. That is the answer. Alright, proceed.
ATTY. FABIE
[27]
I think that is all for the witness, Your Honor.
Leonardo Serrano, Jr. never testified that respondent and Diamond Motors Corporation had a special arrangement
relative to the registration of the new buses. The mere admission of the witness that respondent in the course of
its business transactions allowed special arrangements does not constitute proof that it in fact had a special
arrangement with Diamond Motors Corporation relative to the registration of the new buses.
The evidence on record shows that under the Promissory Note, Chattel Mortgage and Continuing Guaranty,
respondent was the creditor-mortgagee of petitioner Superlines and not the vendor of the new buses. Hence,
petitioners cannot find refuge in Article 1484(3) of the New Civil Code. As correctly held by the Court of Appeals,
what should apply was the Chattel Mortgage executed by petitioner Superlines and respondent in relation to the
[28]
Chattel Mortgage Law.
This Court had consistently ruled that if in an extra-judicial foreclosure of a chattel
mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. To
deny the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given as security and not as payment for
[29]
the debt in case of failure of payment.
Both the Chattel Mortgage Law and Act 3135 governing extra-judicial
foreclosure of real estate mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee
from recovering deficiency of the principal obligation.
In a case of recent vintage, this Court held that if the proceeds of the sale are insufficient to cover the debt in
an extra-judicial foreclosure of the mortgage, the mortgagee is still entitled to claim the deficiency from the
debtor:
To begin with, it is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For when the
legislature intends to deny the right of a creditor to sue for any deficiency resulting from foreclosure of security
given to guarantee an obligation it expressly provides as in the case of pledges [Civil Code, Art. 2115] and in chattel
mortgages, while silent as to the mortgagees right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial foreclosure is
[30]
allowed.
[31]

In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,
this Court declared that under
Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the balance of the proceeds, upon
satisfaction of the principal obligation and costs, thus there is a corollary obligation on the part of the debtormortgagor to pay the deficiency in case of a reduction in the price at public auction.
In fine then, the Court of Appeals correctly ruled that respondent is entitled to a deficiency judgment against
the petitioners.
IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the Court of Appeals dated July 30,
2001 appealed from is AFFIRMED in toto. With costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.

G.R. No. 83851. March 3, 1993.

VISAYAN SAWMILL COMPANY, INC., and ANG TAY, petitioners, vs. THE HONORABLE COURT OF APPEALS and RJH
TRADING, represented by RAMON J. HIBIONADA, proprietor, respondents.
Saleto J. Erames and Edilberto V. Logronio for petitioners.

Eugenio O. Original for private respondent.

SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF VENDEE'S FAILURE TO COMPLY WITH POSITIVE SUSPENSIVE
CONDITION; CASE AT BAR. The petitioner corporation's obligation to sell is unequivocally subject to a positive
suspensive condition, i.e., the private respondent's opening, making or indorsing of an irrevocable and
unconditional letter of credit. The former agreed to deliver the scrap iron only upon payment of the purchase price
by means of an irrevocable and unconditional letter of credit. Otherwise stated, the contract is not one of sale
where the buyer acquired ownership over the property subject to the resolutory condition that the purchase price
would be paid after delivery. Thus, there was to be no actual sale until the opening, making or indorsing of the
irrevocable and unconditional letter of credit. Since what obtains in the case at bar is a mere promise to sell, the
failure of the private respondent to comply with the positive suspensive condition cannot even be considered a
breach casual or serious but simply an event that prevented the obligation of petitioner corporation to
convey title from acquiring binding force. In Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., this Court
stated: ". . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the price
as agreed upon, Myers was not rescinding (or more properly, resolving) the contract, but precisely enforcing it
according to its express terms. In its suit Myers was not seeking restitution to it of the ownership of the thing sold
(since it was never disposed of), such restoration being the logical consequence of the fulfillment of a resolutory
condition, express or implied (Article 1190); neither was it seeking a declaration that its obligation to sell was
extinguished. What it sought was a judicial declaration that because the suspensive condition (full and punctual
payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became effective and,
therefore, it (Myers) was entitled to repossess the property object of the contract, possession being a mere
incident to its right of ownership. It is elementary that, as stated by Castan, -- 'b) Si la condicion suspensiva llega a
faltar, la obligacion se tiene por no existente, y el acreedor pierde todo derecho, incluso el de utilizar las medidas
conservativas.'(3 Castan, Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113).'"
2. ID.; ID.; ID.; RESCISSION. The obligation of the petitioner corporation to sell did not arise; it therefore cannot
be compelled by specific performance to comply with its prestation. In short, Article 1191 of the Civil Code does
not apply; on the contrary, pursuant to Article 1597 of the Civil Code, the petitioner corporation may totally
rescind, as it did in this case, the contract. Said Article provides: "ART. 1597. Where the goods have not been
delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to
perform his obligations, thereunder, or has committed a breach thereof, the seller may totally rescind the contract
of sale by giving notice of his election so to do to the buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT TO DIGGING UP AND GATHERING OF SCRAP IRON NOT
CONSTRUED AS DELIVERY THEREOF; REASONS THEREFOR. Paragraph 6 of the Complaint reads: "6. That on May
17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the stockyard of Visayan Sawmill Co., Inc.
at Cawitan, Sta. Catalina, Negros Oriental to dig and gather the scrap iron and stock the same for weighing." This
permission or consent can, by no stretch of the imagination, be construed as delivery of the scrap iron in the sense
that, as held by the public respondent, citing Article 1497 of the Civil Code, petitioners placed the private
respondent in control and possession thereof. In the first place, said Article 1497 falls under the Chapter
Obligations of the Vendor, which is found in Title VI (Sales), Book IV of the Civil Code. As such, therefore, the
obligation imposed therein is premised on an existing obligation to deliver the subject of the contract. In the
instant case, in view of the private respondent's failure to comply with the positive suspensive condition earlier
discussed, such an obligation had not yet arisen. In the second place, it was a mere accommodation to expedite
the weighing and hauling of the iron in the event that the sale would materialize. The private respondent was not
thereby placed in possession of and control over the scrap iron. Thirdly, We cannot even assume the conversion of
the initial contract or promise to sell into a contract of sale by the petitioner corporation's alleged implied delivery
of the scrap iron because its action and conduct in the premises do not support this conclusion. Indeed, petitioners
demanded the fulfillment of the suspensive condition and eventually cancelled the contract.
4. ID.; CONTRACTS; DAMAGES; MORAL DAMAGES; PURPOSE OF AWARD THEREOF; EXEMPLARY DAMAGES. In
contracts, such as in the instant case, moral damages may be recovered if defendants acted fraudulently and in
bad faith, while exemplary damages may only be awarded if defendants acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In the instant case, the refusal of the petitioners to deliver the scrap iron was
founded on the non-fulfillment by the private respondent of a suspensive condition. It cannot, therefore, be said
that the herein petitioners had acted fraudulently and in bad faith or in a wanton, reckless, oppressive or

malevolent manner. What this Court stated in Inhelder Corp. vs. Court of Appeals needs to be stressed anew: "At
this juncture, it may not be amiss to remind Trial Courts to guard against the award of exhorbitant (sic) damages
that are way out of proportion to the environmental circumstances of a case and which, time and again, this Court
has reduced or eliminated. Judicial discretion granted to the Courts in the assessment of damages must always be
exercised with balanced restraint and measured objectivity." For, indeed, moral damages are emphatically not
intended to enrich a complainant at the expense of the defendant. They are awarded only to enable the injured
party to obtain means, diversion or amusements that will serve to obviate the moral suffering he has undergone,
by reason of the defendant's culpable action. Its award is aimed at the restoration, within the limits of the possible,
of the spiritual status quo ante, and it must be proportional to the suffering inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED; WHEN PERFECTED; CASE AT BAR. Article 1458 of the Civil Code has
this definition: "By a contract of sale, one of the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent." Article
1475 gives the significance of this mutual undertaking of the parties, thus: "The contract of sale is perfected at the
moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From
that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing
the form of contracts." Thus, when the parties entered into the contract entitled "Purchase and Sale of Scrap Iron"
on May 1, 1983, the contract reached the stage of perfection, there being a meeting of the' minds upon the object
which is the subject matter of the contract and the price which is the consideration. Applying Article 1475 of the
Civil Code, from that moment, the parties may reciprocally demand performance of the obligations incumbent
upon them, i.e., delivery by the vendor and payment by the vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED; CASE AT BAR. From the time the seller gave access to the buyer to
enter his premises, manifesting no objection thereto but even sending 18 or 20 people to start the operation, he
has placed the goods in the control and possession of the vendee and delivery is effected. For according to Article
1497, "The thing sold shall be understood as delivered when it is placed in the control and possession of the
vendee." Such action or real delivery (traditio) is the act that transfers ownership. Under Article 1496 of the Civil
Code, "The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of
the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is
transferred from the vendor to the vendee."
3. ID.; ID.; PROVISION IN CONTRACT REGARDING MODE OF PAYMENT NOT ESSENTIAL REQUISITE THEREOF; WHEN
PROVISION CONSIDERED A SUSPENSIVE CONDITION. a provision in the contract regarding the mode of payment,
like the requirement for the opening of the Letter of Credit in this case, is not among the essential requirements of
a contract of sale enumerated in Articles 1305 and 1474, the absence of any of which will prevent the perfection of
the contract from happening. Likewise, it must be emphasized that not every provision regarding payment should
automatically be classified as a suspensive condition. To do so would change the nature of most contracts of sale
into contracts to sell. For a provision in the contract regarding the payment of the price to be considered a
suspensive condition, the parties must have made this clear in certain and unambiguous terms, such as for
instance, by reserving or withholding title to the goods until full payment by the buyer. This was a pivotal
circumstance in the Luzon Brokerage case where the contract in question was replete with very explicit provisions
such as the following: "Title to the properties subject of this contract remains with the Vendor and shall pass to,
and be transferred in the name of the Vendee only upon complete payment of the full price . . .;" 10 the Vendor
(Myers) will execute and deliver to the Vendee a definite and absolute Deed of Sale upon full payment of the
Vendee . . .; and "should the Vendee fail to pay any of the monthly installments, when due, or otherwise fail to
comply with any of the terms and conditions herein stipulated, then this Deed of Conditional Sale shall
automatically and without any further formality, become null and void." It is apparent from a careful reading of
Luzon Brokerage, as well as the cases which preceded it and the subsequent ones applying its doctrines, that the
mere insertion of the price and the mode of payment among the terms and conditions of the agreement will not
necessarily make it a contract to sell. The phrase in the contract "on the following terms and conditions" is
standard form which is not to be construed as imposing a condition, whether suspensive or resolutory, in the
sense of the happening of a future and uncertain event upon which an obligation is made to depend. There must
be a manifest understanding that the agreement is in what may be referred to as "suspended animation" pending
compliance with provisions regarding payment. The reservation of title to the object of the contract in the seller is
one such manifestation. Hence, it has been decided in the case of Dignos v. Court of Appeals that, absent a proviso

in the contract that the title to the property is reserved in the vendor until full payment of the purchase price or a
stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay
within the fixed period, the transaction is an absolute contract of sale and not a contract to sell.
4. ID.; ID.; CONTRACT OF SALE DISTINGUISHED FROM CONTRACT TO SELL; EFFECT OF NON-PAYMENT OF
PURCHASE PRICE; EFFECT OF DELIVERY ON OWNERSHIP OF OBJECT OF CONTRACT. In a contract of sale, the
non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and
discharges the obligations created thereunder. On the other hand, "the parties may stipulate that ownership in the
thing shall not pass to the purchaser until he has fully paid the price." In such a contract to sell, the full payment of
the price is a positive suspensive condition, such that in the event of non-payment, the obligation of the seller to
deliver and transfer ownership never arises. Stated differently, in a contract to sell, ownership is not transferred
upon delivery of property but upon full payment of the purchase price. Consequently, in a contract of sale, after
delivery of the object of the contract has been made, the seller loses ownership and cannot recover the same
unless the contract is rescinded. But in the contract to sell, the seller retains ownership and the buyer's failure to
pay cannot even be considered a breach, whether casual or substantial, but an event that prevented the seller's
duty to transfer title to the object of the contract.
5. ID.; ID.; CASE OF SYCIP V. NATIONAL COCONUT CORPORATION, ET AL., G.R. NO. L-6618, APRIL 28, 1956,
DISTINGUISHED FROM CASE AT BAR. Worthy of mention before concluding is Sycip v. National Coconut
Corporation, et al. since, like this case, it involves a failure to open on time the Letter of Credit required by the
seller. In Sycip, after the buyer offered to buy 2,000 tons of copra, the seller sent a telegram dated December 19,
1946 to the buyer accepting the offer but on condition that the latter opens a Letter of Credit within 48 hours. It
was not until December 26, 1946, however, that the Letter of Credit was opened. The Court, speaking through
Justice Bengzon, held that because of the delay in the opening of the Letter of Credit; the seller was not obliged to
deliver the goods. Two factors distinguish Sycip from the case at bar. First, while there has already been a
perfected contract of sale in the instant case, the parties in Sycip were still undergoing the negotiation process.
The seller's qualified acceptance in Sycip served as a counter offer which prevented the contract from being
perfected. Only an absolute and unqualified acceptance of a definite offer manifests the consent necessary to
perfect a contract. Second, the Court found in Sycip that time was of the essence for the seller who was anxious to
sell to other buyers should the offeror fail to open the Letter of Credit within the stipulated time. In contrast, there
are no indicia in this case that can lead one to conclude that time was of the essence for petitioner as would make
the eleven-day delay a fundamental breach of the contract.
6. ID.; OBLIGATIONS AND CONTRACTS; RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE; WHEN PROPER;
DELAY IN PAYMENT FOR TWENTY DAYS NOT CONSIDERED A SUBSTANTIAL BREACH OF CONTRACT; CASE AT BAR.
The right to rescind pursuant to Article 1191 is not absolute. Rescission will not be permitted for slight or casual
breach of the contract. Here, petitioners claim that the breach is so substantial as to justify rescission . . . I am not
convinced that the circumstances may be characterized as so substantial and fundamental as to defeat the object
of the parties in making the agreement. None of the alleged defects in the Letter of Credit would serve to defeat
the object of the parties. It is to be stressed that the purpose of the opening of a Letter of Credit is to effect
payment. The above-mentioned factors could not have prevented such payment. It is also significant to note that
petitioners sent a telegram to private respondents on May 23, 1983 cancelling the contract. This was before they
had even received on May 26, 1983 the notice from the bank about the opening of the Letter of Credit. How could
they have made a judgment on the materiality of the provisions of the Letter of Credit for purposes of rescinding
the contract even before setting eyes on said document? To be sure, in the contract, the private respondents were
supposed to open the Letter of Credit on May 15, 1983 but, it was not until May 26, 1983 or eleven (11) days later
that they did so. Is the eleven-day delay a substantial breach of the contract as could justify the rescission of the
contract? In Song Fo and Co. v. Hawaiian-Philippine Co., it was held that a delay in payment for twenty (20) days
was not a violation of an essential condition of the contract which would warrant rescission for non-performance.
In the instant case, the contract is bereft of any suggestion that time was of the essence. On the contrary, it is
noted that petitioners allowed private respondents' men to dig and remove the scrap iron located in petitioners'
premises between May 17, 1983 until May 30, 1983 or beyond the May 15, 1983 deadline for the opening of the
Letter of Credit. Hence, in the absence of any indication that the time was of the essence, the eleven-day delay
must be deemed a casual breach which cannot justify a rescission.
DECISION
DAVIDE, JR., J p:

By this petition for review under Rule 45 of the Rules of Court, petitioners urge this Court to set aside the decision
of public respondent Court of Appeals in C.A.-G.R. CV No. 08807, 1 promulgated on 16 March 1988, which affirmed
with modification, in respect to the moral damages, the decision of the Regional Trial Court (RTC) of Iloilo in Civil
Case No. 15128, an action for specific performance and damages, filed by the herein private respondent against
the petitioners. The dispositive portion of the trial court's decision reads as follows:
"IN VIEW OF THE ABOVE FINDINGS, judgment is hereby rendered in favor of plaintiff and against the defendants
ordering the latter to pay jointly and severally plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred Eighty Three and 16/100 (P34,583.16), as actual damages;
2) The sum of One Hundred Thousand (P100,000.00) Pesos, as moral damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as exemplary damages;
4) The sum of TWENTY Five Thousand (P25,000.00) Pesos, as attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as actual litis expenses." 2
The public respondent reduced the amount of moral damages to P25,000.00.
The antecedent facts, summarized by the public respondent, are as follows:
"On May 1, 1983, herein plaintiff-appellee and defendants-appellants entered into a sale involving scrap iron
located at the stockyard of defendant-appellant corporation at Cawitan, Sta. Catalina, Negros Oriental, subject to
the condition that plaintiff-appellee will open a letter of credit in the amount of P250,000.00 in favor of defendantappellant corporation on or before May 15, 1983. This is evidenced by a contract entitled `Purchase and Sale of
Scrap Iron' duly signed by both parties.
On May 17, 1983, plaintiff-appellee through his man (sic), started to dig and gather and (sic) scrap iron at the
defendant-appellant's (sic) premises, proceeding with such endeavor until May 30 when defendants-appellants
allegedly directed plaintiff-appellee's men to desist from pursuing the work in view of an alleged case filed against
plaintiff-appellee by a certain Alberto Pursuelo. This, however, is denied by defendants-appellants who allege that
on May 23, 1983, they sent a telegram to plaintiff-appellee cancelling the contract of sale because of failure of the
latter to comply with the conditions thereof.
On May 24, 1983, plaintiff-appellee informed defendants-appellants by telegram that the letter of credit was
opened May 12, 1983 at the Bank of the Philippine Islands main office in Ayala, but then (sic) the transmittal was
delayed.
On May 26, 1983, defendants-appellants received a letter advice from the Dumaguete City Branch of the Bank of
the Philippine Islands dated May 26, 1983, the content of which is quited (sic) as follows:
'Please be advised that we have received today cable advise from our Head Office which reads as follows:
'Open today our irrevocable Domestic Letter of Credit No. 01456-d fot (sic) P250,000.00 favor ANG TAY c/o Visayan
Sawmill Co., Inc. Dumaguete City, Negros Oriental Account of ARMACO-MARSTEEL ALLOY CORPORATION 2nd Floor
Alpap 1 Bldg., 140 Alfaro stp (sic) Salcedo Village, Makati, Metro Manila Shipments of about 500 MT of assorted
steel scrap marine/heavy equipment expiring on July 24, 1983 without recourse at sight draft drawn on Armaco
Marsteel Alloy Corporation accompanied by the following documents: Certificate of Acceptance by ArmacoMarsteel Alloy Corporation shipment from Dumaguete City to buyer's warehouse partial shipment
allowed/transhipment (sic) not allowed'.
For your information'.
On July 19, 1983, plaintiff-appellee sent a series of telegrams stating that the case filed against him by Pursuelo
had been dismissed and demanding that defendants-appellants comply with the deed of sale, otherwise a case will
be filed against them.
In reply to those telegrams, defendants-appellants' lawyer, on July 20, 1983 informed plaintiff-appellee's lawyer
that defendant-appellant corporation is unwilling to continue with the sale due to plaintiff-appellee's failure to
comply with essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below with a petition for preliminary attachment. The writ
of attachment was returned unserved because the defendant-appellant corporation was no longer in operation
and also because the scrap iron as well as other pieces of machinery can no longer be found on the premises of the
corporation." 3
In his complaint, private respondent prayed for judgment ordering the petitioner corporation to comply with the
contract by delivering to him the scrap iron subject thereof; he further sought an award of actual, moral and
exemplary damages, attorney's fees and the costs of the suit. 4

In their Answer with Counterclaim, 5 petitioners insisted that the cancellation of the contract was justified because
of private respondent's non-compliance with essential pre-conditions, among which is the opening of an
irrevocable and unconditional letter of credit not later than 15 May 1983.
During the pre-trial of the case on 30 April 1984, the parties defined the issues to be resolved; these issues were
subsequently embodied in the pre-trial order, to wit:
"1. Was the contract entitled Purchase and Sale of Scrap Iron, dated May 1, 1983 executed by the parties cancelled
and terminated before the Complaint was filed by anyone of the parties; if so, what are the grounds and reasons
relied upon by the cancelling parties; and were the reasons or grounds for cancelling valid and justified?
2. Are the parties entitled to damages they respectively claim under the pleadings?" 6
On 29 November 1985, the trial court rendered its judgment, the dispositive portion of which was quoted earlier.
Petitioners appealed from said decision to the Court of Appeals which docketed the same as C.A.-G.R. CV No.
08807. In their Brief, petitioners, by way of assigned errors, alleged that the trial court erred:
"1. In finding that there was delivery of the scrap iron subject of the sale;
2. In not finding that plaintiff had not complied with the conditions in the contract of sale;
3. In finding that defendants-appellants were not justified in cancelling the sale;
4. In awarding damages to the plaintiff as against the defendants-appellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in this wise:
"On the first error assigned, defendants-appellants argue that there was no delivery because the purchase
document states that the seller agreed to sell and the buyer agreed to buy 'an undetermined quantity of scrap iron
and junk which the seller will identify and designate.' Thus, it is contended, since no identification and designation
was made, there could be no delivery. In addition, defendants-appellants maintain that their obligation to deliver
cannot be completed until they furnish the cargo trucks to haul the weighed materials to the wharf.
The arguments are untenable. Article 1497 of the Civil Code states:
'The thing sold shall be understood as delivered when it is placed in the control and possession of the vendee.'
In the case at bar, control and possession over the subject matter of the contract was given to plaintiff-appellee,
the buyer, when the defendants-appellants as the sellers allowed the buyer and his men to enter the corporation's
premises and to dig-up the scrap iron. The pieces of scrap iron then (sic) placed at the disposal of the buyer.
Delivery was therefore complete. The identification and designation by the seller does not complete delivery.
On the second and third assignments of error, defendants-appellants argue that under Articles 1593 and 1597 of
the Civil Code, automatic rescission may take place by a mere notice to the buyer if the latter committed a breach
of the contract of sale.
Even if one were to grant that there was a breach of the contract by the buyer, automatic rescission cannot take
place because, as already (sic) stated, delivery had already been made. And, in cases where there has already been
delivery, the intervention of the court is necessary to annul the contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties, while it is true that Article 1593 of the New Civil Code
provides that with respect to movable property, the rescission of the sale shall of right take place in the interest of
the vendor, if the vendee fails to tender the price at the time or period fixed or agreed, however, automatic
rescission is not allowed if the object sold has been delivered to the buyer (Guevarra vs. Pascual, 13 Phil. 311;
Escueta vs. Pando, 76 Phil 256), the action being one to rescind judicially and where (sic) Article 1191, supra,
thereby applies. There being already an implied delivery of the items, subject matter of the contract between the
parties in this case, the defendant having surrendered the premises where the scraps (sic) were found for
plaintiff's men to dig and gather, as in fact they had dug and gathered, this Court finds the mere notice of
resolution by the defendants untenable and not conclusive on the rights of the plaintiff (Ocejo Perez vs. Int. Bank,
37 Phi. 631). Likewise, as early as in the case of Song Fo vs. Hawaiian Philippine Company, it has been ruled that
rescission cannot be sanctioned for a slight or casual breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA 323), the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party has the right to rescind the contract upon failure of
the other to perform the obligation assumed thereunder.
Of course, it must be understood that the right of a party in treating a contract as cancelled or resolved on account
of infractions by the other contracting party must be made known to the other and is always provisional, being
ever subject to scrutiny and review by the proper court.'

Thus, rescission in cases falling under Article 1191 of the Civil Code is always subject to review by the courts and
cannot be considered final.
In the case at bar, the trial court ruled that rescission is improper because the breach was very slight and the delay
in opening the letter of credit was only 11 days.
'Where time is not of the essence of the agreement, a slight delay by one party in the performance of his
obligation is not a sufficient ground for rescission of the agreement. Equity and justice mandates (sic) that the
vendor be given additional (sic) period to complete payment of the purchase price.' (Taguda vs. Vda. de Leon, 132
SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned errors since these are merely corollary to the first three
assigned errors." 8
Their motion to reconsider the said decision having been denied by public respondent in its Resolution of 4 May
1988, 9 petitioners filed this petition reiterating the abovementioned assignment of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in the appreciation of the nature of the transaction between
the petitioner corporation and the private respondent. To this Court's mind, what obtains in the case at bar is a
mere contract to sell or promise to sell, and not a contract of sale.
The trial court assumed that the transaction is a contract of sale and, influenced by its view that there was an
"implied delivery" of the object of the agreement, concluded that Article 1593 of the Civil Code was inapplicable;
citing Guevarra vs. Pascual 10 and Escueta vs. Pando, 11 it ruled that rescission under Article 1191 of the Civil Code
could only be done judicially. The trial court further classified the breach committed by the private respondent as
slight or casual, foreclosing, thereby, petitioners' right to rescind the agreement.
Article 1593 of the Civil Code provides:
"ARTICLE 1593. With respect to movable property, the rescission of the sale shall of right take place in the interest
of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of the thing, should not have
appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a
longer period has been stipulated for its payment."
Article 1191 provides:
"ARTICLE 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public respondent cites Article 1497 of the Civil Code which
provides:
"ARTICLE 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of
the vendee."
In the agreement in question, entitled PURCHASE AND SALE OF SCRAP IRON, 12 the seller bound and promised
itself to sell the scrap iron upon the fulfillment by the private respondent of his obligation to make or indorse an
irrevocable and unconditional letter of credit in payment of the purchase price. Its principal stipulation reads, to
wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an undetermined quantity of scrap iron and junk
which the SELLER will identify and designate now at Cawitan, Sta. Catalina, Negros Oriental, at the price of FIFTY
CENTAVOS (P0.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at Cawitan, Sta. Catalina, Neg. Oriental.
2. To cover payment of the purchase price, BUYER will open, make or indorse an irrevocable and unconditional
letter of credit not later than May 15, 1983 at the Consolidated Bank and Trust Company, Dumaguete City, Branch,
in favor of the SELLER in the sum of TWO HUNDRED AND FIFTY THOUSAND PESOS (P250,000.00), Philippine
Currency.

3. The SELLER will furnish the BUYER free of charge at least three (3) cargo trucks with drivers, to haul the weighed
materials from Cawitan to the TSMC wharf at Sta. Catalina for loading on BUYER's barge. All expenses for labor,
loading and unloading shall be for the account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent (3%) per ton as rust allowance." (Emphasis supplied).
The petitioner corporation's obligation to sell is unequivocally subject to a positive suspensive condition, i.e., the
private respondent's opening, making or indorsing of an irrevocable and unconditional letter of credit. The former
agreed to deliver the scrap iron only upon payment of the purchase price by means of an irrevocable and
unconditional letter of credit. Otherwise stated, the contract is not one of sale where the buyer acquired
ownership over the property subject to the resolutory condition that the purchase price would be paid after
delivery. Thus, there was to be no actual sale until the opening, making or indorsing of the irrevocable and
unconditional letter of credit. Since what obtains in the case at bar is a mere promise to sell, the failure of the
private respondent to comply with the positive suspensive condition cannot even be considered a breach casual
or serious but simply an event that prevented the obligation of petitioner corporation to convey title from
acquiring binding force. In Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 13 this Court stated:
" . . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the price as
agreed upon, Myers was not rescinding (or more properly, resolving) the contract, but precisely enforcing it
according to its express terms. In its suit Myers was not seeking restitution to it of the ownership of the thing sold
(since it was never disposed of), such restoration being the logical consequence of the fulfillment of a resolutory
condition, express or implied (article 1190); neither was it seeking a declaration that its obligation to sell was
extinguished. What it sought was a judicial declaration that because the suspensive condition (full and punctual
payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became effective and,
therefore, it (Myers) was entitled to repossess the property object of the contract, possession being a mere
incident to its right of ownership. It is elementary that, as stated by Castan,
'b) Si la condicion suspensiva llega a faltar, la obligacion se tiene por no existente, y el acreedor pierde todo
derecho, incluso el de utilizar las medidas conservativas.' (3 Cast n, Derecho Civil, 7a Ed., p. 107). (Also Puig Pea,
Der. Civ., T. IV (1), p. 113)'."
In the instant case, not only did the private respondent fail to open, make or indorse an irrevocable and
unconditional letter of credit on or before 15 May 1983 despite his earlier representation in his 24 May 1983
telegram that he had opened one on 12 May 1983, the letter of advice received by the petitioner corporation on
26 May 1983 from the Bank of the Philippine Islands Dumaguete City branch explicitly makes reference to the
opening on that date of a letter of credit in favor of petitioner Ang Tay c/o Visayan Sawmill Co. Inc., drawn without
recourse on ARMACO-MARSTEEL ALLOY CORPORATION and set to expire on 24 July 1983, which is indisputably not
in accordance with the stipulation in the contract signed by the parties on at least three (3) counts: (1) it was not
opened, made or indorsed by the private respondent, but by a corporation which is not a party to the contract; (2)
it was not opened with the bank agreed upon; and (3) it is not irrevocable and unconditional, for it is without
recourse, it is set to expire on a specific date and it stipulates certain conditions with respect to shipment. In all
probability, private respondent may have sold the subject scrap iron to ARMACO-MARSTEEL ALLOY CORPORATION,
or otherwise assigned to it the contract with the petitioners. Private respondent's complaint fails to disclose the
sudden entry into the picture of this corporation.
Consequently, the obligation of the petitioner corporation to sell did not arise; it therefore cannot be compelled by
specific performance to comply with its prestation. In short, Article 1191 of the Civil Code does not apply; on the
contrary, pursuant to Article 1597 of the Civil Code, the petitioner corporation may totally rescind, as it did in this
case, the contract. Said Article provides:
"ARTICLE 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract
of sale, or has manifested his inability to perform his obligations, thereunder, or has committed a breach thereof,
the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer."
The trial court ruled, however, and the public respondent was in agreement, that there had been an implied
delivery in this case of the subject scrap iron because on 17 May 1983, private respondent's men started digging
up and gathering scrap iron within the petitioner's premises. The entry of these men was upon the private
respondent's request. Paragraph 6 of the Complaint reads:
"6. That on May 17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the stockyard of Visayan
Sawmill Co., Inc. at Cawitan, Sta. Catalina, Negros Oriental to dig and gather the scrap iron and stock the same for
weighing." 14

This permission or consent can, by no stretch of the imagination, be construed as delivery of the scrap iron in the
sense that, as held by the public respondent, citing Article 1497 of the Civil Code, petitioners placed the private
respondent in control and possession thereof. In the first place, said Article 1497 falls under the Chapter 15
Obligations of the Vendor, which is found in Title VI (Sales), Book IV of the Civil Code. As such, therefore, the
obligation imposed therein is premised on an existing obligation to deliver the subject of the contract. In the
instant case, in view of the private respondent's failure to comply with the positive suspensive condition earlier
discussed, such an obligation had not yet arisen. In the second place, it was a mere accommodation to expedite
the weighing and hauling of the iron in the event that the sale would materialize. The private respondent was not
thereby placed in possession of and control over the scrap iron. Thirdly, We cannot even assume the conversion of
the initial contract or promise to sell into a contract of sale by the petitioner corporation's alleged implied delivery
of the scrap iron because its action and conduct in the premises do not support this conclusion. Indeed, petitioners
demanded the fulfillment of the suspensive condition and eventually cancelled the contract.
All told, Civil Case No. 15128 filed before the trial court was nothing more than the private respondent's
preemptive action to beat the petitioners to the draw.
One last point. This Court notes the palpably excessive and unconscionable moral and exemplary damages
awarded by the trial court to the private respondent despite a clear absence of any legal and factual basis therefor.
In contracts, such as in the instant case, moral damages may be recovered if defendants acted fraudulently and in
bad faith, 16 while exemplary damages may only be awarded if defendants acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 17 In the instant case, the refusal of the petitioners to deliver the scrap iron was
founded on the non-fulfillment by the private respondent of a suspensive condition. It cannot, therefore, be said
that the herein petitioners had acted fraudulently and in bad faith or in a wanton, reckless, oppressive or
malevolent manner. What this Court stated in Inhelder Corp. vs. Court of Appeals 18 needs to be stressed anew:
"At this juncture, it may not be amiss to remind Trial Courts to guard against the award of exhorbitant (sic)
damages that are way out of proportion to the environmental circumstances of a case and which, time and again,
this Court has reduced or eliminated. Judicial discretion granted to the Courts in the assessment of damages must
always be exercised with balanced restraint and measured objectivity."
For, indeed, moral damages are emphatically not intended to enrich a complainant at the expense of the
defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will
serve to obviate the moral suffering he has undergone, by reason of the defendant's culpable action. Its award is
aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and it must be
proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The decision of public respondent Court of Appeals in C.A.-G.R. CV
No. 08807 is REVERSED and Civil Case No. 15128 of the Regional Trial Court of Iloilo is ordered DISMISSED.
Costs against the private respondent.
SO ORDERED.

[G.R. No. 106418. July 11, 1996]

DANIEL L. BORDON II AND FRANCISCO L. BORBON, petitioners, vs. SERVICEWIDE SPECIALISTS, INC. & HON.
COURT OF APPEALS,respondents.
DECISION
VITUG, J.:
From the decision of the Court of Appeals in CA-G.R. CV No. 30693 which affirmed that of the Regional Trial
Court, NCJR, Branch 39, Manila, in Civil Case No. 85-29954, confirming the disputed possession of a motor vehicle
in favor of private respondent and ordering the payment to it by petitioners of liquidated damages and attorney's
fees, the instant appeal was interposed.
The appellate court adopted the factual findings of the court a quo, to wit:
"The plaintiff's evidence shows among others that on December 7, 1984, defendants Daniel L. Borbon and
Francisco Borbon signed a promissory note (Exh. A) which states among others as follows:
"'PROMISSORY NOTE

Acct.
No.
115008276
Makati,
Metro
Manila,
Philippines
December 7, 1984
'P122,856.00
'For value received (installment price of the chattel/s purchased), I/We jointly and severally promised to pay
Pangasinan Auto Mart, Inc. or order, at its office at NMI Bldg. Buendia Avenue, Makati, MM the sum of One
Hundred Twenty Two Thousand Eight Hundred Fifty Six only (P122,856.00), Philippine Currency, to be payable
without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth,
to wit: P10,238.00 monthly for Twelve (12) months due and payable on the 7 day of each month starting January,
1985, provided that a late payment charge of 3% per month shall be added on each unpaid installment from due
date thereof until fully paid.
xxx xxx
xxx
'It is further agreed that if upon such default, attorney's services are availed of, an additional sum equal to twenty
five percent (25%) of the total sum due thereon, which shall not be less than five hundred pesos, shall be paid to
the holder hereof for attorney's fees plus an additional sum equivalent to twenty five percent (25%) of the total
sum due which likewise shall not be less than five hundred pesos for liquidated damages, aside from expenses of
collection and the legal costs provided for in the Rules of Court.
'It is expressly agreed that all legal actions arising out of this note or in connection with the chattel(s) subject
hereof shall only be brought in or submitted to the jurisdiction of the proper court either in the City of Manila or in
the province, municipality or city where the branch of the holder hereof is located.
'Acceptance by the holder hereof of payment of any installment or any part thereof after due dated (sic) shall not
be considered as extending the time for the payment or any of the installments aforesaid or as a modification of
any of the conditions hereof. Nor shall the failure of the holder hereof to exercise any of its right under this note
constitute or be deemed as a waiver of such rights.
'Maker:
(S/t) DANIEL L. BORBON, II
Address: 14 Colt St., Rancho Estate I, Concepcion Dos, Marikina, MM
(S/t) FRANCISCO BORBON
Address: 73 Sterling Life Home Pamplona, Las Pias, MM
"WITNESSES
(illegible)
____(illegible)_____
'PAY
TO
THE
ORDER
OF
FILINVEST CREDIT CORPORATION
without recourse, notice, presentment and demand waived
PANGASINAN AUTO MART, INC.
BY:
(S/T) K.N.
DULCE
Dealer'
"To secure the Promissory Note, the defendants executed a Chattel Mortgage (Exh. B) on
'One
(1)
Brand
new
1984
Isuzu
KCD
20
Crew
Cab
(Conv.)
Serial
No.
KC20D0F
207685
Key No. 5509
(Exhs. A and B, p. 2 tsn, September 10, 1985)
"The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation on December 10, 1984,
with notice to the defendants (Exh. C, p. 10, Record).
"On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest and title over the Promissory Note
and the chattel mortgage to the plaintiff (Exh. D; p. 3, tsn, Sept. 30, 1985).
"The promissory note stipulates that the installment of P10,238.00 monthly should be paid on the 7th day of each
month starting January 1985, but the defendants failed to comply with their obligation (p. 3, tsn, Sept. 30, 1985).
"Because the defendants did not pay their monthly installments, Filinvest demanded from the defendants the
payment of their installments due on January 29, 1985 by telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985).

"After the accounts were assigned to the plaintiff, the plaintiff attempted to collect by sending a demand letter to
the defendants for them to pay their entire obligation which, as of March 12, 1985, totaled P185,257.80 (Exh. H;
pp. 3-4, tsn, Sept. 30, 1985).
"For their defense, the defendants claim that what they intended to buy from Pangasinan Auto Mart was a
jeepney type Isuzu K. C. Cab. The vehicle that they bought was not delivered (pp. 11-12, tsn, Oct. 17,
1985). Instead, through misrepresentation and machination, the Pangasinan Motor, Inc. delivered an Isuzu crew
cab, as this is the unit available at their warehouse. Later the representative of Pangasinan Auto Mart, Inc.
(assignor) told the defendants that their available stock is an Isuzu Cab but minus the rear body, which the
defendants agreed to deliver with the understanding that the Pangasinan Auto Mart, Inc. will refund the
defendants the amount of P10,000.00 to have the rear body completed (pp. 12-34, Exhs. 2 to 3-3A).
"Despite Communications with the Pangasinan Auto Mart, Inc., the latter was not able to replace the vehicle until
the vehicle delivered was seized by order of this court. The defendants argue that an assignee stands in the place
of an assignor which, to the mind of the court, is correct. The assignee exercise all the rights of the assignor
(Gonzales vs. Rama Plantation Co., C.V. 08630, Dec. 2, 1986).
"The defendants further claim that they are not in default of their obligation because the Pangasinan Auto Mart
was first guilty of not fulfilling its obligation in the contract. The defendants claim that neither party incurs delay if
[1]
the other does not comply with his obligation. (citing Art. 1169, N.C.C.)"
In sustaining the decision of the court a quo, the appellate court ruled that petitioners could not avoid liability
under the promissory note and the chattel mortgage that secured it since private respondent took the note for
value and in good faith.
In their appeal to this Court, petitioners merely seek a modification of the decision of the appellate court
insofar as it has upheld the court a quo in the award of liquidated damages and attorney's fees in favor of private
respondent. Petitioners invoke the provisions of Article 1484 of the Civil Code which reads:
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor
may exercise any of the following remedies:
"(1)
Exact fulfillment of the obligation, should the vendee fail to pay;
"(2)
Cancel the sale, should the vendee's failure to pay cover two or more installments;
"(3)
Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the contrary shall be void."
[2]
The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive, which
[3]
means, as so held in Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation, that "x x x Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed
installments, the vendor or seller has the option to avail of any of these three remedies either to exact
fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased
personal property, if one was constituted. These remedies have been recognized as alternative, not cumulative,
[4]
that the exercise of one would bar the exercise of the others."
When the seller assigns his credit to another person, the latter is likewise bound by the same
law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the
[5]
[6]
deficiency, and the seller-mortgagee is deemed to have renounced any right thereto. A contrario, in the event
the seller-mortgagee first seeks, instead, the enforcement of the additional mortgages, guarantees or other
security arrangements, he must then be held to have lost by waiver or non-choice his lien on the chattel mortgage
of the personal property sold by any mortgaged back to him, although, similar to an action for specific
performance, he may still levy on it.
In ordinary alternative obligations, a mere choice categorically and unequivocally made and then
communicated by the person entitled to exercise the option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no
fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and
alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only
upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it
is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted
to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is
selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure,

that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are
[7]
insufficient to satisfy the judgment credit. So, also, a mere demand to surrender the object which is not heeded
[8]
by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would
have the effect of foreclosure.
The parties here concede that the action for replevin has been instituted for the foreclosure of the vehicle in
question (now in the possession of private respondent). The sole issue raised before us in this appeal is focused on
the legal propriety of the affirmance by the appellate court of the awards made by the court a quo of liquidated
damages and attorney's fees to private respondent. Petitioners hold that under Article 1484 of the Civil Code,
aforequoted, the vendor-mortgagee or its assignees loses any right "to recover any unpaid balance of the price"
and any "agreement to the contrary (would be) void."
[9]
The argument is aptly made. In Macondray & Co. vs. Eustaquio we have said that the phrase "any unpaid
balance" can only mean the deficiency judgment to which the mortgagee may be entitled to when the proceeds
from the auction sale are insufficient to cover the "full amount of the secured obligation which x x x include
interest on the principal, attorney's fees, expenses of collection, and costs." In sum, we have observed that the
legislative intent is not to merely limit the proscription of any further action to the "unpaid balance of
[10]
the principal" but, as so later ruled inLuneta Motor Co. vs. Salvador, to all other claims that may likewise be
called for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and
attorney's fees.
[11]
In Filipinas Investment & Finance Corporation vs. Ridad while we reiterated and expressed our agreement
on the basic philosophy behind Article 1484, we stressed, nevertheless, that the protection given to the buyermortgagor should not be considered to be without circumscription or as being preclusive of all other laws or legal
principles. Hence, borrowing from the examples made in Filipinas Investment, where the mortgagor unjustifiably
refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he
concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be
awarded.
Private respondent bewails the instant petition in that petitioners have failed to specifically raise the issue on
liquidated damages and attorney's fees stipulated in the actionable documents. In several cases, we have ruled
that as long as the questioned items bear relevance and close relation to those specifically raised, the interest of
justice would dictate that they, too, must be considered and resolved and that the rule that only theories raised in
the initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not
[12]
concomitant matters, to support or oppose the cause of action.
Given the circumstances, we must strike down the award for liquidated damages made by the court a
quo but we uphold the grant of attorney's fees which we, like the appellate court, find to be
reasonable. Parenthetically, while the promissory note may appear to have been a negotiable instrument, private
respondent, however, clearly cannot claim unawareness of its accompanying documents so as to thereby gain a
right greater than that of the assignor.
WHEREFORE, the appealed decision is MODIFIED by deleting therefrom the award for liquidated damages; in
all other respects the judgment of the appellate court is AFFIRMED. No cost.
SO ORDERED.
Padilla (Chairman), Bellosillo, Kapunan, and Hermosisima, Jr., JJ., concur.

G.R. No. L-39806 January 27, 1983

LUIS
RIDAD
and
LOURDES
RIDAD, plaintiffs-appellees,
vs.
FILIPINAS INVESTMENT and FINANCE CORPORATION, JOSE D. SEBASTIAN and JOSE SAN AGUSTIN, in his capacity
as Sheriff, defendants-appellants.
Osmundo Victoriano for plaintiffs-appellees.
Wilhelmina V. Joven for defendant-appellants.

DE CASTRO, J:
Appeal from the decision of the Court of First Instance of Rizal, Branch I, in Civil Case No. 9140 for annulment of
contract, originally filed with the Court of Appeals but was subsequently certified to this Court pursuant to Section
3 of Rule 50 of the Rules of Court, there being no issue of fact involved in this appeal.
The materials facts of the case appearing on record may be stated as follows: On April 14, 1964, plaintiffs
purchased from the Supreme Sales arid Development Corporation two (2) brand new Ford Consul Sedans
complete with accessories, for P26,887 payable in 24 monthly installments. To secure payment thereof, plaintiffs
executed on the same date a promissory note covering the purchase price and a deed of chattel mortgage not only
on the two vehicles purchased but also on another car (Chevrolet) and plaintiffs' franchise or certificate of public
convenience granted by the defunct Public Service Commission for the operation of a taxi fleet. Then, with the
conformity of the plaintiffs, the vendor assigned its rights, title and interest to the above-mentioned promissory
note and chattel mortgage to defendant Filipinas Investment and Finance Corporation.
Due to the failure of the plaintiffs to pay their monthly installments as per promissory note, the defendant
corporation foreclosed the chattel mortgage extra-judicially, and at the public auction sale of the two Ford Consul
cars, of which the plaintiffs were not notified, the defendant corporation was the highest bidder and purchaser.
Another auction sale was held on November 16, 1965, involving the remaining properties subject of the deed of
chattel mortgage since plaintiffs' obligation was not fully satisfied by the sale of the aforesaid vehicles, and at the
public auction sale, the franchise of plaintiffs to operate five units of taxicab service was sold for P8,000 to the
highest bidder, herein defendant corporation, which subsequently sold and conveyed the same to herein
defendant Jose D. Sebastian, who then filed with the Public Service Commission an application for approval of said
sale in his favor.
On February 21, 1966, plaintiffs filed an action for annulment of contract before the Court of First Instance of Rizal,
Branch I, with Filipinas Investment and Finance Corporation, Jose D. Sebastian and Sheriff Jose San Agustin, as
party-defendants. By agreement of the parties, the case was submitted for decision in the lower court on the basis
of the documentary evidence adduced by the parties during the pre-trial conference. Thereafter, the lower court
rendered judgment as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS, this Court declares the chattel mortgage, Exhibit "C",
to be null and void in so far as the taxicab franchise and the used Chevrolet car of plaintiffs are
concerned, and the sale at public auction conducted by the City Sheriff of Manila concerning said
taxicab franchise, to be of no legal effect.1wph1.t The certificate of sale issued by the City
Sheriff of Manila in favor of Filipinas Investment and Finance Corporation concerning plaintiffs'
taxicab franchise for P8,000 is accordingly cancelled and set aside, and the assignment thereof
made by Filipinas Investment in favor of defendant Jose Sebastian is declared void and of no legal
effect. (Record on Appeal, p. 128).
From the foregoing judgment, defendants appealed to the Court of Appeals which, as earlier stated, certified the
appeal to this Court, appellants imputing to the lower court five alleged errors, as follows:
I
THE LOWER COURT ERRED IN DECLARING THE CHATTEL MORTGAGE, EXHIBIT "C", NULL AND
VOID.
II
THE LOWER COURT ERRED IN HOLDING THAT THE SALE AT PUBLIC AUCTION CONDUCTED BY THE
CITY SHERIFF OF MANILA CONCERNING THE TAXICAB FRANCHISE IS OF NO LEGAL EFFECT.
III
THE LOWER COURT ERRED IN SETTING ASIDE THE CERTIFICATE OF SALE ISSUED BY THE CITY
SHERIFF OF MANILA IN FAVOR OF FILIPINAS INVESTMENT AND FINANCE CORPORATION
COVERING PLAINTIFFS' TAXICAB FRANCHISE.
IV
THE LOWER COURT ERRED IN DECLARING VOID AND OF NO LEGAL EFFECT THE ASSIGNMENT OF
THE TAXICAB FRANCHISE MADE BY FILIPINAS INVESTMENT AND FINANCE CORPORATION IN
FAVOR OF DEFENDANT.
V

THE LOWER COURT (sic) IN NOT DECIDING THE CASE IN FAVOR OF THE DEFENDANTS. Appellants'
Brief, pp. 9 & 10)
From the aforequoted assignment of errors, the decisive issue for consideration is the validity of the chattel
mortgage in so far as the franchise and the subsequent sale thereof are concerned.
The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil Code which
states:
Art. 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise y of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
Under the above-quoted article of the Civil Code, the vendor of personal property the purchase price of which is
payable in installments, has the right, should the vendee default in the payment of two or more of the agreed
installments, to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the
1
mortgage on the purchased personal property, if one was constituted. Whichever right the vendor elects, he
2
cannot avail of the other, these remedies being alternative, not cumulative. Furthermore, if the vendor avails
himself of the right to foreclose his mortgage, the law prohibits him from further bringing an action against the
vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the foreclosure
3
sale. The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise,
the mortgagor-buyer would find himself without the property and still owing practically the full amount of his
4
original indebtedness.
In the instant case, defendant corporation elected to foreclose its mortgage upon default by the plaintiffs in the
payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased
vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as
specifically mentioned, by which it is deemed to have renounced any and all rights which it might otherwise have
under the promissory note and the chattel mortgage as well as the payment of the unpaid balance.
Consequently, the lower court rightly declared the nullity of the chattel mortgage in question in so far as the
taxicab franchise and the used Chevrolet car of plaintiffs are concerned, under the authority of the ruling in the
case of Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71 Phil. 587, the facts of which are similar to those in
the case at bar. There, we have the same situation wherein the vendees offered as security for the payment of the
purchase price not only the motor vehicles which were bought on installment, but also a residential lot and a
house of strong materials. This Court sustained the pronouncement made by the lower court on the nullity of the
mortgage in so far as it included the house and lot of the vendees, holding that under the law, should the vendor
choose to foreclose the mortgage, he has to content himself with the proceeds of the sale at the public auction of
the chattels which were sold on installment and mortgaged to him and having chosen the remedy of foreclosure,
he cannot nor should he be allowed to insist on the sale of the house and lot of the vendees, for to do so would be
equivalent to obtaining a writ of execution against them concerning other properties which are separate and
distinct from those which were sold on installment. This would indeed be contrary to public policy and the very
spirit and purpose of the law, limiting the vendor's right to foreclose the chattel mortgage only on the thing sold.
In the case of Cruz v. Filipinos Investment & Finance Corporation, 23 SCRA 791, this Court ruled that the vendor of
personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the thing
sold from having a recourse against the additional security put up by a third party to guarantee the purchaser's
performance of his obligation on the theory that to sustain the same would overlook the fact that if the guarantor
should be compelled to pay the balance of the purchase price, said guarantor will in turn be entitled to recover
what he has paid from the debtor-vendee, and ultimately it will be the latter who will be made to bear the
payment of the of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him,
thereby indirectly subverting the protection given the latter. Consequently, the additional mortgage was ordered
cancelled. Said ruling was reiterated in the case of Pascual v. Universal Motors Corporation, 61 SCRA 121. If the
vendor under such circumstance is prohibited from having a recourse against the additional security for reasons

therein stated, there is no ground why such vendor should not likewise be precluded from further extrajudicially
foreclosing the additional security put up by the vendees themselves, as in the instant case, it being tantamount to
5
a further action that would violate Article 1484 of the Civil Code, for then is actually no between an additional
security put up by the vendee himself and such security put up by a third party insofar as how the burden would
ultimately fall on the vendee himself is concerned.
Reliance on the ruling in Southern Motors, inc. v. Moscoso, 2 SCRA 168, that in sales on installments, where the
action instituted is for and the mortgaged property is subsequently attached and sold, the sales thereof does not
amount to a foreclosure of the mortgage, hence, the seller creditor is entitled to a deficiency judgment, does not
for the stand of the appellants for that case is entirely different from the case at bar. In that case, the vendor has
availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact fulfillment of the obligation
whereas in the present case, the remedy availed of was foreclosure of the chattel mortgage.
The foregoing disposition renders superfluous a determination of the other issue raised by the parties as to the
validity of the auction sale, in so far as the franchise of plaintiffs is concerned, which sale had been admittedly held
without any notice to the plaintiffs.
IN VIEW HEREOF, the judgment appealed from is hereby affirmed, with costs against the appellants.
SO ORDERED.

G.R. No. 162267

July 4, 2008
PCI
LEASING
AND
FINANCE,
INC., petitioner,
vs.
UCPB GENERAL INSURANCE CO., INC., respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking a reversal of the
1
Decision of the Court of Appeals (CA) dated December 12, 2003 affirming with modification the Decision of the
Regional Trial Court (RTC) of Makati City which ordered petitioner and Renato Gonzaga (Gonzaga) to pay, jointly
2
and severally, respondent the amount of P244,500.00 plus interest; and the CA Resolution dated February 18,
2004 denying petitioner's Motion for Reconsideration.
The facts, as found by the CA, are undisputed:
On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer car with Plate Number PHD-206 owned by
United Coconut Planters Bank was traversing the Laurel Highway, Barangay Balintawak, Lipa City. The car
was insured with plantiff-appellee [UCPB General Insurance Inc.], then driven by Flaviano Isaac with
Conrado Geronimo, the Asst. Manager of said bank, was hit and bumped by an 18-wheeler Fuso Tanker
Truck with Plate No. PJE-737 and Trailer Plate No. NVM-133, owned by defendants-appellants PCI Leasing
& Finance, Inc. allegedly leased to and operated by defendant-appellant Superior Gas & Equitable Co., Inc.
(SUGECO) and driven by its employee, defendant appellant Renato Gonzaga.
The impact caused heavy damage to the Mitsubishi Lancer car resulting in an explosion of the rear part of
the car. The driver and passenger suffered physical injuries. However, the driver defendant-appellant
Gonzaga continued on its [sic] way to its [sic] destination and did not bother to bring his victims to the
hospital.
Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing the insurance coverage
of the damaged car.
As the 18-wheeler truck is registered under the name of PCI Leasing, repeated demands were made by
plaintiff-appellee for the payment of the aforesaid amounts. However, no payment was made. Thus,
3
plaintiff-appellee filed the instant case on March 13, 1991.
PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held liable for the collision,
since the driver of the truck, Gonzaga, was not its employee, but that of its co-defendant Superior Gas & Equitable
4
Co., Inc. (SUGECO). In fact, it was SUGECO, and not petitioner, that was the actual operator of the truck, pursuant

to a Contract of Lease signed by petitioner and SUGECO. Petitioner, however, admitted that it was the owner of
6
the truck in question.
7
After trial, the RTC rendered its Decision dated April 15, 1999, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff UCPB General
Insurance [respondent], ordering the defendants PCI Leasing and Finance, Inc., [petitioner] and Renato
Gonzaga, to pay jointly and severally the former the following amounts: the principal amount
of P244,500.00 with 12% interest as of the filing of this complaint until the same is paid; P50,000.00 as
attorney's fees; andP20,000.00 as costs of suit.
8
SO ORDERED.
Aggrieved by the decision of the trial court, petitioner appealed to the CA.
In its Decision dated December 12, 2003, the CA affirmed the RTC's decision, with certain modifications, as follows:
WHEREFORE, the appealed decision dated April 15, 1999 is hereby AFFIRMED with modification that the
award of attorney's fees is hereby deleted and the rate of interest shall be six percent (6%) per annum
computed from the time of the filing of the complaint in the trial court until the finality of the judgment. If
the adjudged principal and the interest remain unpaid thereafter, the interest rate shall be twelve percent
(12%) per annum computed from the time the judgment becomes final and executory until it is fully
satisfied.
9
SO ORDERED.
Petitioner filed a Motion for Reconsideration which the CA denied in its Resolution dated February 18, 2004.
Hence, herein Petition for Review.
The issues raised by petitioner are purely legal:
Whether petitioner, as registered owner of a motor vehicle that figured in a quasi-delict may be held
liable, jointly and severally, with the driver thereof, for the damages caused to third parties.
Whether petitioner, as a financing company, is absolved from liability by the enactment of Republic Act
(R.A.) No. 8556, or the Financing Company Act of 1998.
Anent the first issue, the CA found petitioner liable for the damage caused by the collision since under the Public
Service Act, if the property covered by a franchise is transferred or leased to another without obtaining the
requisite approval, the transfer is not binding on the Public Service Commission and, in contemplation of law, the
grantee continues to be responsible under the franchise in relation to the operation of the vehicle, such as damage
10
or injury to third parties due to collisions.
Petitioner claims that the CA's reliance on the Public Service Act is misplaced, since the said law applies only to
cases involving common carriers, or those which have franchises to operate as public utilities. In contrast, the case
before this Court involves a private commercial vehicle for business use, which is not offered for service to the
11
general public.
Petitioner's contention has partial merit, as indeed, the vehicles involved in the case at bar are not common
carriers, which makes the Public Service Act inapplicable.
However, the registered owner of the vehicle driven by a negligent driver may still be held liable under applicable
jurisprudence involving laws on compulsory motor vehicle registration and the liabilities of employers for quasidelicts under the Civil Code.
The principle of holding the registered owner of a vehicle liable for quasi-delicts resulting from its use is well12
established in jurisprudence. Erezo v. Jepte, with Justice Labrador as ponente, wisely explained the reason behind
this principle, thus:
Registration is required not to make said registration the operative act by which ownership in vehicles is
transferred, as in land registration cases, because the administrative proceeding of registration does not
bear any essential relation to the contract of sale between the parties (Chinchilla vs. Rafael and
Verdaguer, 39 Phil. 888), but to permit the use and operation of the vehicle upon any public highway
(section 5 [a], Act No. 3992, as amended.) The main aim of motor vehicle registration is to identify the
owner so that if any accident happens, or that any damage or injury is caused by the vehicle on the public
highways, responsibility therefor can be fixed on a definite individual, the registered owner. Instances are
numerous where vehicles running on public highways caused accidents or injuries to pedestrians or other
vehicles without positive identification of the owner or drivers, or with very scant means of identification.
It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle

registration is primarily ordained, in the interest of the determination of persons responsible for damages
or injuries caused on public highways.
"'One of the principal purposes of motor vehicles legislation is identification of the vehicle and of
the operator, in case of accident; and another is that the knowledge that means of detection are
always available may act as a deterrent from lax observance of the law and of the rules of
conservative and safe operation. Whatever purpose there may be in these statutes, it is
subordinate at the last to the primary purpose of rendering it certain that the violator of the law
or of the rules of safety shall not escape because of lack of means to discover him.' The purpose
of the statute is thwarted, and the displayed number becomes a 'snare and delusion,' if courts
would entertain such defenses as that put forward by appellee in this case. No responsible
person or corporation could be held liable for the most outrageous acts of negligence, if they
should be allowed to place a 'middleman' between them and the public, and escape liability by
the manner in which they recompense their servants." (King vs. Brenham Automobile Co., 145
S.W. 278, 279.)
With the above policy in mind, the question that defendant-appellant poses is: should not the registered
owner be allowed at the trial to prove who the actual and real owner is, and in accordance with such
proof escape or evade responsibility and lay the same on the person actually owning the vehicle? We hold
with the trial court that the law does not allow him to do so; the law, with its aim and policy in mind, does
not relieve him directly of the responsibility that the law fixes and places upon him as an incident or
consequence of registration. Were a registered owner allowed to evade responsibility by proving who the
supposed transferee or owner is, it would be easy for him, by collusion with others or otherwise, to
escape said responsibility and transfer the same to an indefinite person, or to one who possesses no
property with which to respond financially for the damage or injury done. A victim of recklessness on the
public highways is usually without means to discover or identify the person actually causing the injury or
damage. He has no means other than by a recourse to the registration in the Motor Vehicles Office to
determine who is the owner. The protection that the law aims to extend to him would become illusory
were the registered owner given the opportunity to escape liability by disproving his ownership. If the
policy of the law is to be enforced and carried out, the registered owner should not be allowed to prove
the contrary to the prejudice of the person injured, that is, to prove that a third person or another has
become the owner, so that he may thereby be relieved of the responsibility to the injured person.
The above policy and application of the law may appear quite harsh and would seem to conflict with truth
and justice. We do not think it is so. A registered owner who has already sold or transferred a vehicle has
the recourse to a third-party complaint, in the same action brought against him to recover for the damage
or injury done, against the vendee or transferee of the vehicle. The inconvenience of the suit is no
justification for relieving him of liability; said inconvenience is the price he pays for failure to comply with
the registration that the law demands and requires.
In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily responsible
for the damage caused to the vehicle of the plaintiff-appellee, but he (defendant-appellant) has a right to
be indemnified by the real or actual owner of the amount that he may be required to pay as damage for
13
the injury caused to the plaintiff-appellant.
14
The case is still good law and has been consistently cited in subsequent cases. Thus, there is no good reason to
depart from its tenets.
For damage or injuries arising out of negligence in the operation of a motor vehicle, the registered owner may be
held civilly liable with the negligent driver either 1) subsidiarily, if the aggrieved party seeks relief based on
a delictor crime under Articles 100 and 103 of the Revised Penal Code; or 2) solidarily, if the complainant seeks
relief based on a quasi-delict under Articles 2176 and 2180 of the Civil Code. It is the option of the plaintiff whether
to waive completely the filing of the civil action, or institute it with the criminal action, or file it separately or
15
independently of a criminal action; his only limitation is that he cannot recover damages twice for the same act
16
or omission of the defendant.
In case a separate civil action is filed, the long-standing principle is that the registered owner of a motor vehicle is
primarily and directly responsible for the consequences of its operation, including the negligence of the driver,
17
with respect to the public and all third persons. In contemplation of law, the registered owner of a motor vehicle
is the employer of its driver, with the actual operator and employer, such as a lessee, being considered as merely

18

the owner's agent. This being the case, even if a sale has been executed before a tortious incident, the sale, if
unregistered, has no effect as to the right of the public and third persons to recover from the registered
19
owner. The public has the right to conclusively presume that the registered owner is the real owner, and may sue
20
accordingly.
In the case now before the Court, there is not even a sale of the vehicle involved, but a mere lease, which
remained unregistered up to the time of the occurrence of the quasi-delict that gave rise to the case. Since a lease,
unlike a sale, does not even involve a transfer of title or ownership, but the mere use or enjoyment of property,
there is more reason, therefore, in this instance to uphold the policy behind the law, which is to protect the
unwitting public and provide it with a definite person to make accountable for losses or injuries suffered in
21
vehicular accidents. This is and has always been the rationale behind compulsory motor vehicle registration
under the Land Transportation and Traffic Code and similar laws, which, as early as Erezo, has been guiding the
courts in their disposition of cases involving motor vehicular incidents. It is also important to emphasize that such
22
principles apply to all vehicles in general, not just those offered for public service or utility.
23
The Court recognizes that the business of financing companies has a legitimate and commendable purpose. In
24
earlier cases, it considered a financial lease or financing lease a legal contract, though subject to the restrictions
25
of the so-called Recto Law or Articles 1484 and 1485 of the Civil Code. In previous cases, the Court adopted the
statutory definition of a financial lease or financing lease, as:
[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases or
acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and
office machines, and other movable or immovable property in consideration of the periodic payment by
the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price
or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of
not less than two (2) years during which the lessee has the right to hold and use the leased property, x x x
but with no obligation or option on his part to purchase the leased property from the owner-lessor at the
26
end of the lease contract.
Petitioner presented a lengthy discussion of the purported trend in other jurisdictions, which apparently tends to
favor absolving financing companies from liability for the consequences of quasi-delictual acts or omissions
27
involving financially leased property. The petition adds that these developments have been legislated in our
28
jurisdiction in Republic Act (R.A.) No. 8556, which provides:
Section 12. Liability of lessors. - Financing companies shall not be liable for loss, damage or injury caused
by a motor vehicle, aircraft, vessel, equipment, machinery or other property leased to a third person or
entity except when the motor vehicle, aircraft, vessel, equipment or other property is operated by the
financing company, its employees or agents at the time of the loss, damage or injury.1avvphi1
Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of the new Sec. 12 to the old
law, is deemed to have absolved petitioner from liability, fails to convince the Court.
These developments, indeed, point to a seeming emancipation of financing companies from the obligation to
compensate claimants for losses suffered from the operation of vehicles covered by their lease. Such, however, are
not applicable to petitioner and do not exonerate it from liability in the present case.
The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not supersede or repeal the
law on compulsory motor vehicle registration. No part of the law expressly repeals Section 5(a) and (e) of R.A. No.
4136, as amended, otherwise known as the Land Transportation and Traffic Code, to wit:
Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer of any type used or
operated on or upon any highway of the Philippines must be registered with the Bureau of Land
Transportation (now the Land Transportation Office, per Executive Order No. 125, January 30, 1987, and
Executive Order No. 125-A, April 13, 1987) for the current year in accordance with the provisions of this
Act.
xxxx
(e) Encumbrances of motor vehicles. - Mortgages, attachments, and other encumbrances of motor
vehicles,in order to be valid against third parties must be recorded in the Bureau (now the Land
Transportation Office). Voluntary transactions or voluntary encumbrances shall likewise be properly
recorded on the face of all outstanding copies of the certificates of registration of the vehicle concerned.

Cancellation or foreclosure of such mortgages, attachments, and other encumbrances shall likewise be
recorded, and in the absence of such cancellation, no certificate of registration shall be issued without the
corresponding notation of mortgage, attachment and/or other encumbrances.
x x x x (Emphasis supplied)
Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is frowned upon, unless there is
clear showing that the later statute is so irreconcilably inconsistent and repugnant to the existing law that they
29
cannot be reconciled and made to stand together. There is nothing in R.A. No. 4136 that is inconsistent and
incapable of reconciliation.
Thus, the rule remains the same: a sale, lease, or financial lease, for that matter, that is not registered with the
Land Transportation Office, still does not bind third persons who are aggrieved in tortious incidents, for the latter
30
need only to rely on the public registration of a motor vehicle as conclusive evidence of ownership. A lease such
as the one involved in the instant case is an encumbrance in contemplation of law, which needs to be registered in
31
order for it to bind third parties. Under this policy, the evil sought to be avoided is the exacerbation of the
suffering of victims of tragic vehicular accidents in not being able to identify a guilty party. A contrary ruling will
not serve the ends of justice. The failure to register a lease, sale, transfer or encumbrance, should not benefit the
parties responsible, to the prejudice of innocent victims.
The non-registration of the lease contract between petitioner and its lessee precludes the former from enjoying
the benefits under Section 12 of R.A. No. 8556.
This ruling may appear too severe and unpalatable to leasing and financing companies, but the Court believes that
petitioner and other companies so situated are not entirely left without recourse. They may resort to third-party
complaints against their lessees or whoever are the actual operators of their vehicles. In the case at bar, there is, in
fact, a provision in the lease contract between petitioner and SUGECO to the effect that the latter shall indemnify
and hold the former free and harmless from any "liabilities, damages, suits, claims or judgments" arising from the
32
latter's use of the motor vehicle. Whether petitioner would act against SUGECO based on this provision is its own
option.
The burden of registration of the lease contract is minuscule compared to the chaos that may result if registered
owners or operators of vehicles are freed from such responsibility. Petitioner pays the price for its failure to obey
the law on compulsory registration of motor vehicles for registration is a pre-requisite for any person to even enjoy
the privilege of putting a vehicle on public roads.
WHEREFORE, the petition is DENIED. The Decision dated December 12, 2003 and Resolution dated February 18,
2004 of the Court of Appeals are AFFIRMED.
Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, Reyes, JJ., concur.

ELISCO

TOOL MANUFACTURING CORPORATION, petitioner,

LANTAN, and RINA LANTAN, respondents

vs. COURT

OF

APPEALS,

ROLANDO

DECISION
MENDOZA, J.:
[1]

This is a petition for review of the decision of the Court of Appeals which affirmed in toto the decision of the
Regional Trial Court of Pasig, Branch 51, declaring respondent spouses Rolando Lantan and Rina Lantan owners of
a 1979 model 2-door Colt Lancer car which they had acquired under a car plan for top employees of the Elizalde
group of companies.
The facts are as follows:
Private respondent Rolando Lantan was employed at the Elisco Tool Manufacturing Corporation as head of its
cash department. On January 9, 1980, he entered into an agreement with the company which provided as
[2]
follows:

That, EMPLOYER is the owner of a car Colt Lancer 2 door, Model 1979, with Serial No. 3403 under LTC Registration
Certificate No. 0526558;
That, for and in consideration of a monthly rental of ONE THOUSAND TEN & 65/100 ONLY (P1,010.65) Philippine
Currency, EMPLOYER desire to lease and EMPLOYEE accept in lease the motor vehicle aforementioned for a period
of FIVE (5) years;
That, the EMPLOYEE agree as he hereby agreed to pay the lease rental thru salary deduction from his monthly
remuneration in the amount as above specified for a period of FIVE (5) years;
That, for the duration of the lease contract, all expenses and costs of registration, insurance, repair and
maintenance, gasoline, oil, part replacement inclusive of all expenses necessary to maintain the vehicle in top
condition shall be for the account of the EMPLOYEE;
th
That, at the end of FIVE (5) year period or upon payment of the 60 monthly rental, EMPLOYEE may exercise the
option to purchase the motor vehicle from the EMPLOYER and all monthly rentals shall be applied to the payment
of the full purchase price of the car and further, should EMPLOYEE desire to exercise this option before the 5-year
period lapse, he may do so upon payment of the remaining balance on the five year rental unto the EMPLOYER, it
being understood however that the option is limited to the EMPLOYEE;
That, upon failure of the EMPLOYEE to pay THREE (3) accumulated monthly rentals will vest upon the EMPLOYER
the full right to lease the vehicle to another EMPLOYEE;
That, in the event of resignation and or dismissal from the service, the EMPLOYEE shall return the subject motor
vehicle to the EMPLOYER in its compound at Kalawaan Sur, Pasig, Metro Manila in good working and body
condition.
On the same day, January 9, 1980, private respondent executed a promissory note reading as follows:

[3]

PROMISSORY NOTE
P60,639.00
FOR VALUE RECEIVED, we promise to pay [to] the order of ELISCO TOOL MFG. CORP. SPECIAL PROJECT, at its
office at Napindan, Taguig, Metro Manila, Philippines, the sum of ONE THOUSAND TEN & 65/100 PESOS
(P1,010.65), Philippine Currency, beginning January 9, 1980, without the necessity of notice or demand in
accordance with the schedule of payment hereto attached as an integral part hereof.
In case of default in the payment of any installment on the stipulated due date, we agree to pay as liquidated
damages 2% of the amount due and unpaid for every thirty (30) days of default or fraction thereof. Where the
default covers two successive installments, the entire unpaid balance shall automatically become due and payable.
It is further agreed that if upon such default attorneys services are availed of, an additional sum equal to TWENTY
(20%) percent of the total amount due thereon, but in no case be less than P1,000.00 shall be paid to holder(s)
hereof as attorneys fees in addition to the legal costs provided for by law. We agree to submit to the jurisdiction
of the proper courts of Makati, Metro Manila or the Province of Rizal, at the option of the holder(s) waiving for this
purpose any other venue.
In case extraordinary inflation or deflation of the currency stipulated should occur before this obligation is paid in
full, the value of the currency at the time of the establishment of the obligation will be the basis of payment.
Holder(s) may accept partial payment reserving his right of recourse against each and all endorsers who hereby
waive DEMAND PRESENTMENT and NOTICE.
Acceptance by the holder(s) of payment or any part thereof after due date shall not be considered as extending
the time for the payment of the aforesaid obligation or as a modification of any of the condition hereof.
After taking possession of the car, private respondent installed accessories therein worth P15,000.00.
In 1981, Elisco Tool ceased operations, as a result of which private respondent Rolando Lantan was laid
off. Nonetheless, as of December 4, 1984, private respondent was able to make payments for the car in the total
amount of P61,070.94.
On June 6, 1986, petitioner filed a complaint, entitled replevin plus sum of money, against private
respondent Rolando Lantan, his wife Rina, and two other persons, identified only as John and Susan Doe, before
the Regional Trial Court of Pasig, Metro Manila. Petitioner alleged that private respondents failed to pay the
monthly rentals which, as of May 1986, totalled P39,054.86; that despite demands, private respondents failed to

settle their obligation thereby entitling petitioner to the possession of the car; that petitioner was ready to post a
bond in an amount double the value of the car, which was P60,000; and that in case private respondents could not
return the car, they should be held liable for the amount of P60,000 plus the accrued monthly rentals thereof, with
interest at the rate of 14% per annum, until fully paid. Petitioners complaint contained the following prayer:
WHEREFORE, plaintiffs prays that judgment be rendered as follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus legal interest from the date of
demand until the whole obligation is fully paid;
ON THE SECOND CAUSE OF ACTION
To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more particularly described in
paragraph 3 of the Complaint, from defendant Rolando Lantan and/or defendants Rina Lantan, John Doe, Susan
Doe and other person or persons in whose possession the said motor vehicle may be found, complete with
accessories and equipment, and direct deliver thereof to plaintiff in accordance with law, and after due hearing to
confirm said seizure and plaintiffs possession over the same;
ON THE ALTERNATIVE CAUSE OF ACTION
In the event that manual delivery of the subject motor vehicle cannot be effected for any reason, to render
judgment in favor of plaintiff and against defendant Rolando Lantan ordering the latter to pay the sum of SIXTY
THOUSAND PESOS (P60,000.00) which is the estimated actual value of the above-described motor vehicle, plus the
accrued monthly rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully paid;
PRAYER COMMON TO ALL CAUSES OF ACTION
1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to twenty-five percent (25%)
of his outstanding obligation, for and as attorneys fees;
2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding fees and other incidental
expenses to be proved during the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this Honorable Court may deem just and equitable under the
premises.
Upon petitioners posting a bond in the amount of P120,000, the sheriff took possession of the car in
[4]
question and after five (5) days turned it over to petitioner.
In due time, private respondents filed their answer. They claimed that the agreement on which the
complaint was based had not been signed by petitioners representative, Jose Ma. S. del Gallego, although it had
been signed by private respondent Rolando Lantan; that their true agreement was to buy and sell and not lease
with option to buy the car in question at a monthly amortization of P1,000; and that petitioner accepted the
installment payments made by them and, in January 1986, agreed that the balance of the purchase price would be
paid on or before December 31, 1986. Private respondents cited the provision of the agreement making
respondent Rolando Lantan liable for the expenses for registration, insurance, repair and maintenance, gasoline,
oil and part replacements, inclusive of all necessary expenses, as evidence that the transaction was one of
sale. Private respondents further alleged that, in any event, petitioner had waived its rights under the agreement
because of the following circumstances: (a) while the parties agreed that payment was to be made through salary
deduction, petitioner accepted payments in cash or checks; (b) although they agreed that upon the employees
resignation, the car should be returned to the employer, private respondent Rolando Lantan was not required to
do so when he resigned in September 1982; (c) petitioner did not lease the vehicle to another employee after
private respondent Rolando Lantan had allegedly failed to pay three monthly rentals; and (d) petitioner failed to
enforce the manner of payment under the agreement by its acceptance of payments in various amounts and on
different dates.
In its reply, petitioner maintained that the contract between the parties was one of lease with option to
purchase and that the promissory note was merely a nominal security for the agreement. It contended that the
mere acceptance of the amounts paid by private respondents and for indefinite periods of time was not evidence
that the parties agreement was one of purchase and sale. Neither was it guilty of laches because, under the law,

an action based on a written contract can be brought within ten (10) years from the time the action accrues. On
[5]
August 31, 1987, the trial court rendered its decision.
The trial court sustained private respondents claim that the agreement in question was one of sale and held
that the latter had fully paid the price of the car having paid the total amount of P61,070.94 aside from installing
accessories in the car worth P15,000.00. Said the trial court:
Plaintiff now comes claiming ownership of the car in question and has succeeded in repossessing the same by
virtue of the writ of seizure issued in this case on July 29, 1986. Not content with recovering possession of the said
car, plaintiff still asks that defendants should pay it the sum of P39,054.86, allegedly representing the rentals due
on the car from the time of the last payment made by defendants to its repossession thereof. This is indeed a
classic case of one having his cake and eating it too! Under the Recto law (Arts. 1484 & 1485, Civil Code), the
vendor who repossesses the goods sold on installments, has no right to sue the vendee for the unpaid balance
thereof.
The Court can take judicial notice of the practice wherein executives enjoy car plans in progressive companies. The
agreement of January 9, 1980 between the parties is one such car plan. If defendant Rolando Lantan failed to keep
up with his amortizations on the car in question, it was not because of his own liking but rather he was pushed to it
by circumstances when his employer folded up and sent him to the streets. That plaintiff was giving all the chance
to defendants to pay the value of the car and acquire full ownership thereof is shown by the delay in instituting the
instant case. . . .
The court likewise found that the amount of P61,070.94 included a 2% penalty for late payments for which
there was no stipulation in the agreement:
. . . The agreement and defendant Rolando Lantans promissory note of January 9, 1980 do not provide even for
interest on the remaining balance of the purchase price of the car. This privilege extended by corporations to their
top executives is considered additional emolument to them. And so the reason for the lack of provision for
interest, much less penalty charges. Therefore, all payments made by defendant should be applied to the principal
account. Since the principal was only P60,639.00, the defendants have made an overpayment of P431.94 which
should be returned to defendant by plaintiff.
For this reason, it ordered petitioner to pay private respondents the amount of P431.94 as excess payment, as well
as rentals at the rate of P1,000 a month for depriving private respondents of the use of their car, and moral
damages for the worry, embarrassment, and mental torture suffered by them on account of the repossession of
the car.
The dispositive portion of the trial courts decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of defendants and against plaintiff, dismissing plaintiffs
complaint; declaring defendants the lawful owners of that Colt Lancer 2-door, Model 1979 with Serial No. 3403
under Registration Certificate No. 0526558; ordering plaintiff to deliver to defendants the aforesaid motor vehicle
complete with all the accessories installed therein by defendants; should for any reason plaintiff is unable to
deliver the said car to defendants, plaintiff is ordered to pay to defendants the value of said car in the sum of
P60,639.00 plus P15,000.00, the value of the accessories, plus interest of 12% on the said sums from August 6,
1986; and sentencing plaintiff to pay defendants the following sums:
a) P12,431.94 as actual damages broken down as follows:
1) P431.94 overpayment made by defendants to plaintiff; and
2) P12,000.00 rental on the car in question from August 6, 1986 to August 5, 1987, plus the sum of P1,000.00 a
month beginning August 6, 1987 until the car is returned by plaintiff to, and is received by, defendant;
b) the sum of P20,000.00 as moral damages;

c) the sum of P5,000.00 as exemplary damages; and

d) the sum of P5,000.00 as attorneys fees.
Costs against the plaintiff.
SO ORDERED.
Petitioner appealed to the Court of Appeals. On the other hand, private respondents filed a motion for
execution pending appeal. In its resolution of March 9, 1989, the Court of Appeals granted private respondents
motion and, upon the filing of a bond, in the amount of P70,000.00, it issued a writ of execution, pursuant to
[6]
which the car was delivered to private respondents on April 16, 1989.
On August 26, 1992, the Court of Appeals rendered its decision, affirming in toto the decision of the trial
court. Hence, the instant petition for review on certiorari.
Petitioner contends that the Court of Appeals erred (a) in disregarding the admission in the pleadings as to what documents contain the terms of the
parties agreement.
(b) in holding that the interest stipulation in respondents Promissory Note was not valid and binding.
(c) in holding that respondents had fully paid their obligations.
It further argues that On the assumption that the Lease Agreement with option to buy in this case may be treated as a sale on
installments, the respondent Court of Appeals nonetheless erred in not finding that the parties have validly agreed
that the petitioner as seller may *i+ cancel the contract upon the respondents default on three or more
installments, [ii] retake possession of the personalty, and [iii] keep the rents already paid.
First. Petitioner does not deny that private respondent Rolando Lantan acquired the vehicle in question
under a car plan for executives of the Elizalde group of companies. Under a typical car plan, the company advances
the purchase price of a car to be paid back by the employee through monthly deductions from his salary. The
[7]
company retains ownership of the motor vehicle until it shall have been fully paid for. However, retention of
registration of the car in the companys name is only a form of a lien on the vehicle in the event that the employee
would abscond before he has fully paid for it. There are also stipulations in car plan agreements to the effect that
should the employment of the employee concerned be terminated before all installments are fully paid, the
[8]
vehicle will be taken by the employer and all installments paid shall be considered rentals per agreement.
This Court has long been aware of the practice of vendors of personal property of denominating a contract of
sale on installment as one of lease to prevent the ownership of the object of the sale from passing to the vendee
[9]
until and unless the price is fully paid. As this Court noted in Vda. de Jose v. Barrueco:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that
form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases
either with options to the buyer to purchase for a small consideration at the end of term, provided the so-called
rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest
in the lessee. It is obvious that such transactions are leases only in name. The so-called rent must necessarily be
regarded as payment of the price in installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.
In an earlier case, Manila Gas Corporation v. Calupitan,
water heater, the Court said:

[10]

which involved a lease agreement of a stove and a

. . . [W]e are of the opinion, and so hold, that when in a so-called contract of lease of personal property it is
th
stipulated that the alleged lessee shall pay a certain amount upon signing the contract, and on or before the 5 of
every month, another specific amount, by way of rental, giving the alleged lessee the right of option to buy the

said personal property before the expiration of the period of lease, which is the period necessary for the payment
of the said amount at the rate of so much a month, deducting the payments made by way of advance and alleged
monthly rentals, and the said alleged lessee makes the advance payment and other monthly installments, noting in
his account and in the receipts issued to him that said payments are on account of the price of the personal
[11]
property allegedly leased, said contract is one of sale on installment and not of lease.
In U.S. Commercial v. Halili,
[13]
installment. Said the Court:

[12]

a lease agreement was declared to be in fact a sale of personal property by

. . . There can hardly be any question that the so-called contracts of lease on which the present action is based
were veritable leases of personal property with option to purchase, and as such come within the purview of the
above article [Art. 1454-A of the old Civil Code on sale of personal property by installment]. In fact the instruments
(exhibits `A and `B) embodying the contracts bear the heading or title `Lease-Sale (Lease-Sale of Transportation
and/or Mechanical Equipment). The contracts fix the value of the vehicles conveyed to the lessee and expressly
refer to the remainder of said value after deduction of the down payment made by the lessee as `the unpaid
balance of the purchase price of the leased equipment. The contracts also provide that upon the full value (plus
stipulated interest) being paid, the lease would terminate and title to the leased property would be transferred to
the lessee. Indeed, as the defendant-appellant points out, the inclusion of a clause waiving benefit of article 1454A of the old Civil Code is conclusive proof of the parties understanding that they were entering into a lease
contract with option to purchase which come within the purview of said article.
Being leases of personal property with option to purchase as contemplated in the above article, the contracts in
question are subject to the provision that when the lessor in such case has chosen to deprive the lessee of the
enjoyment of such personal property, he shall have no further action against the lessee for the recovery of any
unpaid balance owing by the latter, agreement to the contrary being null and void.
It was held that in choosing to deprive the defendant of possession of the leased vehicles, the plaintiff waived its
right to bring an action to recover unpaid rentals on the said vehicles.
In the case at bar, although the agreement provides for the payment by private respondents of monthly
th
rentals, the fifth paragraph thereof gives them the option to purchase the motor vehicle at the end of the 5 year
th
or upon payment of the 60 monthly rental when all monthly rentals shall be applied to the payment of the full
purchase price of the car. It is clear that the transaction in this case is a lease in name only. The so-called monthly
rentals are in truth monthly amortizations on the price of the car.
Second. The contract being one of sale on installment, the Court of Appeals correctly applied to it the
following provisions of the Civil Code:
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendees
failure to pay cover two or more installments. In this case, he shall have no further action against
the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be
void.
ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.
The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise
[14]
of the others. This limitation applies to contracts purporting to be leases of personal property with option to buy
[15]
by virtue of Art. 1485. The condition that the lessor has deprived the lessee of possession or enjoyment of the
thing for the purpose of applying Art. 1485 was fulfilled in this case by the filing by petitioner of the complaint for

replevin to recover possession of movable property. By virtue of the writ of seizure issued by the trial court, the
[16]
deputy sheriff seized the vehicle on August 6, 1986 and thereby deprived private respondents of its use. The car
was not returned to private respondent until April 16, 1989, after two (2) years and eight (8) months, upon
[17]
issuance by the Court of Appeals of a writ of execution.
Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount that they
[18]
were supposed to pay as of May 1986, plus interest at the legal rate. At the same time, it prayed for the
issuance of a writ of replevin or the delivery to it of the motor vehicle complete with accessories and
[19]
equipment.
In the event the car could not be delivered to petitioner, it was prayed that private respondent
Rolando Lantan be made to pay petitioner the amount of P60,000.00, the estimated actual value of the car, plus
accrued monthly rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully
[20]
paid. This prayer of course cannot be granted, even assuming that private respondents have defaulted in the
payment of their obligation. This led the trial court to say that petitioner wanted to eat its cake and have it too.
Notwithstanding this impossibility in petitioners choice of remedy, this case should be considered as one for
specific performance, pursuant to Art. 1484(1), consistent with its prayer with respect to the unpaid installments
as of May 1986. In this view, the prayer for the issuance of a writ of replevin is only for the purpose of insuring
specific performance by private respondents.
Both the trial court and the Court of Appeals correctly ruled that private respondents could no longer be held
liable for the amounts of P39,054.86 or P60,000.00 because private respondents had fulfilled their part of the
obligation. The agreement does not provide for the payment of interest on unpaid monthly rentals or
installments because it was entered into in pursuance of a car plan adopted by the company for the benefit of its
deserving employees. As the trial court correctly noted, the car plan was intended to give additional benefits to
executives of the Elizalde group of companies.
Petitioner contends that the promissory note provides for such interest payment. However, as the Court of
Appeals held:
The promissory note in which the 2% monthly interest on delayed payments appears does not form part of the
contract. There is no consideration for the promissory note. There is nothing to show that plaintiff advanced the
purchase price of the vehicle for Lantan so as to make the latter indebted to the former for the amount stated in
the promissory note. Thus, as stated in the complaint: That sometime in January, 1980, defendant Rolando
Lantan entered into an agreement with the plaintiff for the lease of a motor vehicle supplied by the latter, with the
option to purchase at the end of the period of lease . . . . In other words, plaintiff did not buy the vehicle for
Rolando Lantan, advancing the purchase price for that purpose. There is nothing in the complaint or in the
evidence to show such arrangement. Therefore, there was no indebtedness secured by a promissory note to
speak of. There being no consideration for the promissory note, the same, including the penalty clause contained
[21]
thereon, has no binding effect.
There is no evidence that private respondents received the amount of P60,639.00 indicated in the promissory
note as its value. What was proven below is the fact that private respondents received from petitioner the 2-door
Colt Lancer car which was valued at P60,000 and for which private respondent Rolando Lantan paid monthly
amortizations of P1,010.65 through salary deductions.
Indeed, as already stated, private respondents default in paying installments was due to the cessation of
operations of Elizalde Steel Corporation, petitioners sister company. Petitioners acceptance of payments made
by private respondents through cash and checks could have been impelled solely by petitioners inability to deduct
the amortizations from private respondent Rolando Lantans salary which he stopped receiving when his
employment was terminated in September 1982. Apparently, to minimize the adverse consequences of the
termination of private respondents employment, petitioner accepted even late payments. That petitioner
accepted payments from private respondent Rolando Lantan more than two (2) years after the latters
employment had been terminated constitutes a waiver of petitioners right to collect interest upon the delayed
payments. The 2% surcharge is not provided for in the agreement. Its collection by the company would in fact run
counter to the purpose of providing added emoluments to its deserving employees. Consequently, the total
amount of P61,070.94 already paid to petitioner should be considered payment of the full purchase price of the
car or the total installments paid.

Third. Private respondents presented evidence that they felt bad, were worried, embarrassed and mentally
[22]
tortured by the repossession of the car.
This has not been rebutted by petitioner. There is thus a factual basis
for the award of moral damages. In addition, petitioner acted in a wanton, fraudulent, reckless and oppressive
[23]
manner in filing the instant case, hence, the award of exemplary damages is justified. The award of attorneys
fees is likewise proper considering that private respondents were compelled to incur expenses to protect their
[24]
rights.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with costs against petitioner.
SO ORDERED.
Bellosillo (Chairman), Puno, Quisumbing and Buena, JJ., concur.

G.R. No. 142618

July 12, 2007
PCI
LEASING
AND
FINANCE,
INC., Petitioner,
vs.
GIRAFFE-X CREATIVE IMAGING, INC., Respondent.
DECISION
GARCIA, J.:
On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as amended by R.A. No. 8556
in relation to Articles 1484 and 1485 of the Civil Code, petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for
short) has directly come to this Court via this petition for review under Rule 45 of the Rules of Court to nullify and
set aside the Decision and Resolution dated December 28, 1998 and February 15, 2000, respectively, of the
Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money
and/or personal property with prayer for a writ of replevin, thereat instituted by the petitioner against the herein
respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).
The facts:
1
On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a Lease Agreement, whereby
the former leased out to the latter one (1) set of Silicon High Impact Graphics and accessories worthP3,900,00.00
and one (1) unit of Oxberry Cinescan 6400-10 worth P6,500,000.00. In connection with this agreement, the parties
2
subsequently signed two (2) separate documents, each denominated as Lease Schedule. Likewise forming parts of
the basic lease agreement were two (2) separate documents denominated Disclosure Statements of Loan/Credit
3
Transaction (Single Payment or Installment Plan) that GIRAFFE also executed for each of the leased equipment.
These disclosure statements inter alia described GIRAFFE, vis--vis the two aforementioned equipment, as the
"borrower" who acknowledged the "net proceeds of the loan," the "net amount to be financed," the "financial
charges," the "total installment payments" that it must pay monthly for thirty-six (36) months, exclusive of the 36%
per annum "late payment charges." Thus, for the Silicon High Impact Graphics, GIRAFFE agreed to pay P116,878.21
monthly, and for Oxberry Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCI
LEASING for 36 months of the lease, exclusive of monetary penalties imposable, if proper, is as indicated below:
P116,878.21 @ month (for the Silicon High
Impact Graphics) x 36 months =
P 4,207,615.56
-- PLUS-P181,362.00 @ month (for the Oxberry
Cinescan) x 36 months =
P 6,529,032.00
Total Amount to be paid by GIRAFFE
(or the NET CONTRACT AMOUNT)

P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount of P3,120,000.00 by way of
"guaranty deposit," a sort of performance and compliance bond for the two equipment. Furthermore, the same
agreement embodied a standard acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or
other accounts due.
A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-payment obligations. And
following a three-month default, PCI LEASING, through one Atty. Florecita R. Gonzales, addressed a formal pay-or4
surrender-equipment type of demand letter dated February 24, 1998 to GIRAFFE.
The demand went unheeded.
Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant case against GIRAFFE. In its
5
6
complaint, docketed in said court as Civil Case No. 98-34266 and raffled to Branch 227 thereof, PCI LEASING
prayed for the issuance of a writ of replevin for the recovery of the leased property, in addition to the following
relief:
2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the defendant [GIRAFFE], as
follows:
a. Declaring the plaintiff entitled to the possession of the subject properties;
b. Ordering the defendant to pay the balance of rental/obligation in the total amount of P8,248,657.47
inclusive of interest and charges thereon;
c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit. (Words in bracket
added.)
Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of replevin, paving the way for PCI
LEASING to secure the seizure and delivery of the equipment covered by the basic lease agreement.
Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein arguing that the seizure of
the two (2) leased equipment stripped PCI LEASING of its cause of action. Expounding on the point, GIRAFFE argues
that, pursuant to Article 1484 of the Civil Code on installment sales of personal property, PCI LEASING is barred
from further pursuing any claim arising from the lease agreement and the companion contract documents, adding
that the agreement between the parties is in reality a lease of movables with option to buy. The given situation,
GIRAFFE continues, squarely brings into applicable play Articles 1484 and 1485 of the Civil Code, commonly
referred to as the Recto Law. The cited articles respectively provide:
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
(Emphasis added.)
ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.
It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies to its contractual relation
with PCI LEASING because the lease agreement in question, as supplemented by the schedules documents, is really
a lease with option to buy under the companion article, Article 1485. Consequently, so GIRAFFE argues, upon the
seizure of the leased equipment pursuant to the writ of replevin, which seizure is equivalent to foreclosure, PCI
LEASING has no further recourse against it. In brief, GIRAFFE asserts in its Motion to Dismiss that the civil
complaint filed by PCI LEASING is proscribed by the application to the case of Articles 1484 and 1485, supra, of the
Civil Code.
In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with GIRAFFE is a straight lease
without an option to buy. Prescinding therefrom, PCI LEASING rejects the applicability to the suit of Article 1484 in

relation to Article 1485 of the Civil Code, claiming that, under the terms and conditions of the basic agreement, the
relationship between the parties is one between an ordinary lessor and an ordinary lessee.
7
In a decision dated December 28, 1998, the trial court granted GIRAFFEs motion to dismiss mainly on the
interplay of the following premises: 1) the lease agreement package, as memorialized in the contract documents, is
akin to the contract contemplated in Article 1485 of the Civil Code, and 2) GIRAFFEs loss of possession of the
leased equipment consequent to the enforcement of the writ of replevin is "akin to foreclosure, the condition
precedent for application of Articles 1484 and 1485 [of the Civil Code]." Accordingly, the trial court dismissed Civil
Case No. Q-98-34266, disposing as follows:
WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any claim to the personal
properties subject of replevin which are now in the possession of the plaintiff [PCI LEASING], plaintiff is DEEMED
fully satisfied pursuant to the provisions of Articles 1484 and 1485 of the New Civil Code. By virtue of said
provisions, plaintiff is DEEMED estopped from further action against the defendant, the plaintiff having recovered
thru (replevin) the personal property sought to be payable/leased on installments, defendants being under
protection of said RECTO LAW. In view thereof, this case is hereby DISMISSED.
With its motion for reconsideration having been denied by the trial court in its resolution of February 15,
8
2000, petitioner has directly come to this Court via this petition for review raising the sole legal issue of whether or
not the underlying Lease Agreement, Lease Schedules and the Disclosure Statements that embody the financial
leasing arrangement between the parties are covered by and subject to the consequences of Articles 1484 and
1485 of the New Civil Code.
As in the court below, petitioner contends that the financial leasing arrangement it concluded with the respondent
represents a straight lease covered by R.A. No. 5980, the Financing Company Act, as last amended by R.A. No.
8556, otherwise known as Financing Company Act of 1998, and is outside the application and coverage of the
Recto Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and business.
The recourse is without merit.
R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or regulatory legislation, merely
providing a regulatory framework for the organization, registration, and regulation of the operations of financing
companies. As couched, it does not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional financial leasing and other
financial leasing concepts. Thus, the relevancy of Article 18 of the Civil Code which reads:
Article 18. - In matters which are governed by special laws, their deficiency shall be supplied by the provisions of
this [Civil] Code.
Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on installment sales of movable
property, does not apply to a financial leasing agreement because such agreement, by definition, does not confer
on the lessee the option to buy the property subject of the financial lease. To the petitioner, the absence of an
option-to-buy stipulation in a financial leasing agreement, as understood under R.A. No. 8556, prevents the
application thereto of Articles 1484 and 1485 of the Civil Code.
We are not persuaded.
The Court can allow that the underlying lease agreement has the earmarks or made to appear as a financial
9
leasing, a term defined in Section 3(d) of R.A. No. 8556 as a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires,
at the instance of the lessee, machinery, equipment, office machines, and other movable or immovable property
in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least
seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit
over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the
leased property but with no obligation or option on his part to purchase the leased property from the ownerlessor at the end of the lease contract.
In its previous holdings, however, the Court, taking into account the following mix: the imperatives of equity, the
contractual stipulations in question and the actuations of parties vis--vis their contract, treated disguised
transactions technically tagged as financing lease, like here, as creating a different contractual relationship.
Notable among the Courts decisions because of its parallelism with this case is BA Finance Corporation v. Court of
10
Appeals which involved a motor vehicle. Thereat, the Court has treated a purported financial lease as actually a
sale of a movable property on installments and prevented recovery beyond the buyers arrearages. Wrote the
Court in BA Finance:

The transaction involved is one of a "financial lease" or "financial leasing," where a financing company would, in
effect, initially purchase a mobile equipment and turn around to lease it to a client who gets, in addition, an option
to purchase the property at the expiry of the lease period. xxx.
xxx
xxx
xxx
The pertinent provisions of [RA] 5980, thus implemented, read:
"'Financing companies,' are primarily organized for the purpose of extending credit facilities to consumers
either by leasing of motor vehicles, and office machines and equipment, and other movable property."
"'Credit' shall mean any loan, any contract to sell, or sale or contract of sale of property or service, under
which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase
contract; .;"
The foregoing provisions indicate no less than a mere financing scheme extended by a financing company to a
client in acquiring a motor vehicle and allowing the latter to obtain the immediate possession and use thereof
pending full payment of the financial accommodation that is given.
In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for thirty six (36) months at a
"monthly rental" (P1,689.40), or for a total amount of P60,821.28. The contract also contained *a+ clause
[requiring the Lessee to give a guaranty deposit in the amount of P20,800.00] xxx
After the private respondent had paid the sum of P41,670.59, excluding the guaranty deposit of P20,800.00, he
stopped further payments. Putting the two sums together, the financing company had in its hands the amount of
P62,470.59 as against the total agreed "rentals" of P60,821.28 or an excess of P1,649.31.
The respondent appellate court considered it only just and equitable for the guaranty deposit made by the private
respondent to be applied to his arrearages and thereafter to hold the contract terminated. Adopting the
ratiocination of the court a quo, the appellate court said:
xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant should and must be credited in his
favor, in the interest of fairness, justice and equity. The plaintiff should not be allowed to unduly enrich itself at the
expense of the defendant. xxx This is even more compelling in this case where although the transaction, on its
face, appear ostensibly, to be a contract of lease, it is actually a financing agreement, with the plaintiff financing
the purchase of defendant's automobile . The Court is constrained, in the interest of truth and justice, to go into
this aspect of the transaction between the plaintiff and the defendant with all the facts and circumstances
existing in this case, and which the court must consider in deciding the case, if it is to decide the case according to
all the facts. xxx.
xxx
xxx
xxx
Considering the factual findings of both the court a quo and the appellate court, the only logical conclusion is that
the private respondent did opt, as he has claimed, to acquire the motor vehicle, justifying then the application of
the guarantee deposit to the balance still due and obligating the petitioner to recognize it as an exercise of the
option by the private respondent. The result would thereby entitle said respondent to the ownership and
possession of the vehicle as the buyer thereof. We, therefore, see no reversible error in the ultimate judgment of
11
the appellate court. (Italics in the original; underscoring supplied and words in bracket added.)
12
In Cebu Contractors Consortium Co. v. Court of Appeals, the Court viewed and thus declared a financial lease
agreement as having been simulated to disguise a simple loan with security, it appearing that the financing
company purchased equipment already owned by a capital-strapped client, with the intention of leasing it back to
the latter.
In the present case, petitioner acquired the office equipment in question for their subsequent lease to the
respondent, with the latter undertaking to pay a monthly fixed rental therefor in the total amount of P292,531.00,
or a total of P10,531,116.00 for the whole 36 months. As a measure of good faith, respondent made an up-front
guarantee deposit in the amount of P3,120,000.00. The basic agreement provides that in the event the respondent
fails to pay any rental due or is in a default situation, then the petitioner shall have cumulative remedies, such as,
13
but not limited to, the following:
1. Obtain possession of the property/equipment;
2. Retain all amounts paid to it. In addition, the guaranty deposit may be applied towards the payment of
"liquidated damages";
3. Recover all accrued and unpaid rentals;
4. Recover all rentals for the remaining term of the lease had it not been cancelled, as additional penalty;
5. Recovery of any and all amounts advanced by PCI LEASING for GIRAFFEs account xxx;

6. Recover all expenses incurred in repossessing, removing, repairing and storing the property; and,
7. Recover all damages suffered by PCI LEASING by reason of the default.
In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be forfeited in the event the
respondent, for any reason, returns the equipment before the expiration of the lease.
At bottom, respondent had paid the equivalent of about a years lease rentals, or a total of P3,510,372.00, more or
less. Throw in the guaranty deposit (P3,120,000.00) and the respondent had made a total cash outlay
ofP6,630,372.00 in favor of the petitioner. The replevin-seized leased equipment had, as alleged in the complaint,
an estimated residual value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4, 1998.
Adding all cash advances thus made to the residual value of the equipment, the total value which the petitioner
had actually obtained by virtue of its lease agreement with the respondent amounts to P13,530,372.00
(P3,510,372.00 + P3,120,000.00 + P6,900.000.00 = P13,530,372.00).
The acquisition cost for both the Silicon High Impact Graphics equipment and the Oxberry Cinescan was, as stated
14
in no less than the petitioners letter to the respondent dated November 11, 1996 approving in the latters favor
a lease facility, was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from the total amount,
i.e.,P13,530,372.00, creditable to the respondent, it would clearly appear that petitioner realized a gross income
ofP5,430,372.00 from its lease transaction with the respondent. The amount of P5,430,372.00 is not yet a final
figure as it does not include the rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.
15
As may be noted, petitioners demand letter fixed the amount of P8,248,657.47 as representing the respondents
"rental" balance which became due and demandable consequent to the application of the acceleration and other
clauses of the lease agreement. Assuming, then, that the respondent may be compelled to pay P8,248,657.47,
then it would end up paying a total of P21,779,029.47 (P13,530,372.00 + P8,248,657.47 =P21,779,029.47) for its
use - for a year and two months at the most - of the equipment. All in all, for an investment of P8,100,000.00, the
petitioner stands to make in a years time, out of the transaction, a total of P21,779,029.47, or a net
of P13,679,029.47, if we are to believe its outlandish legal submission that the PCI LEASING-GIRAFFE Lease
Agreement was an honest-to-goodness straight lease.
A financing arrangement has a purpose which is at once practical and salutary. R.A. No. 8556 was, in fact, precisely
enacted to regulate financing companies operations with the end in view of strengthening their critical role in
providing credit and services to small and medium enterprises and to curtail acts and practices prejudicial to the
16
public interest, in general, and to their clienteles, in particular. As a regulated activity, financing arrangements
are not meant to quench only the thirst for profit. They serve a higher purpose, and R.A. No. 8556 has made that
abundantly clear.
We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and obligations, as between
each other, of the financial lessor and the lessee. In determining the respective responsibilities of the parties to the
agreement, courts, therefore, must train a keen eye on the attendant facts and circumstances of the case in order
to ascertain the intention of the parties, in relation to the law and the written agreement. Likewise, the public
interest and policy involved should be considered. It may not be amiss to state that, normally, financing contracts
come in a standard prepared form, unilaterally thought up and written by the financing companies requiring only
the personal circumstances and signature of the borrower or lessee; the rates and other important covenants in
these agreements are still largely imposed unilaterally by the financing companies. In other words, these
agreements are usually one-sided in favor of such companies. A perusal of the lease agreement in question
exposes the many remedies available to the petitioner, while there are only the standard contractual prohibitions
against the respondent. This is characteristic of standard printed form contracts.
17
There is more. In the adverted February 24, 1998 demand letter sent to the respondent, petitioner fashioned its
claim in the alternative: payment of the full amount of P8,248,657.47, representing the unpaid balance for the
entire 36-month lease period or the surrender of the financed asset under pain of legal action. To quote the letter:
Demand is hereby made upon you to pay in full your outstanding balance in the amount of P8,248,657.47 on or
before March 04, 1998 OR to surrender to us the one (1) set Silicon High Impact Graphics and one (1) unit Oxberry
Cinescan 6400-10
We trust you will give this matter your serious and preferential attention. (Emphasis added).
Evidently, the letter did not make a demand for the payment of the P8,248,657.47 AND the return of the
equipment; only either one of the two was required. The demand letter was prepared and signed by Atty. Florecita
R. Gonzales, presumably petitioners counsel. As such, the use of "or" instead of "and" in the letter could hardly be
treated as a simple typographical error, bearing in mind the nature of the demand, the amount involved, and the

fact that it was made by a lawyer. Certainly Atty. Gonzales would have known that a world of difference exists
between "and" and "or" in the manner that the word was employed in the letter.
A rule in statutory construction is that the word "or" is a disjunctive term signifying dissociation and independence
18
of one thing from other things enumerated unless the context requires a different interpretation.
In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an alternative. It often connects
a series of words or propositions indicating a choice of either. When "or" is used, the various members of the
19
enumeration are to be taken separately.
The word "or" is a disjunctive term signifying disassociation and independence of one thing from each of the other
20
things enumerated.
The demand could only be that the respondent need not return the equipment if it paid the P8,248,657.47
outstanding balance, ineluctably suggesting that the respondent can keep possession of the equipment if it
exercises its option to acquire the same by paying the unpaid balance of the purchase price. Stated otherwise, if
the respondent was not minded to exercise its option of acquiring the equipment by returning them, then it need
not pay the outstanding balance. This is the logical import of the letter: that the transaction in this case is a lease in
name only. The so-called monthly rentals are in truth monthly amortizations of the price of the leased office
equipment.
On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE lease agreement is in reality a
lease with an option to purchase the equipment. This has been made manifest by the actions of the petitioner
itself, foremost of which is the declarations made in its demand letter to the respondent. There could be no other
explanation than that if the respondent paid the balance, then it could keep the equipment for its own; if not, then
it should return them. This is clearly an option to purchase given to the respondent. Being so, Article 1485 of the
Civil Code should apply.
The present case reflects a situation where the financing company can withhold and conceal - up to the last
moment - its intention to sell the property subject of the finance lease, in order that the provisions of the Recto
Law may be circumvented. It may be, as petitioner pointed out, that the basic "lease agreement" does not contain
a "purchase option" clause. The absence, however, does not necessarily argue against the idea that what the
parties are into is not a straight lease, but a lease with option to purchase. This Court has, to be sure, long been
aware of the practice of vendors of personal property of denominating a contract of sale on installment as one of
lease to prevent the ownership of the object of the sale from passing to the vendee until and unless the price is
21
fully paid. As this Court noted in Vda. de Jose v. Barrueco:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that
form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases
either with options to the buyer to purchase for a small consideration at the end of term, provided the so-called
rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest
in the lessee. It is obvious that such transactions are leases only in name. The so-called rent must necessarily be
regarded as payment of the price in installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.
22
In another old but still relevant case of U.S. Commercial v. Halili, a lease agreement was declared to be in fact a
sale of personal property by installments. Said the Court:
. . . There can hardly be any question that the so-called contracts of lease on which the present action is based
were veritable leases of personal property with option to purchase, and as such come within the purview of the
above article [Art. 1454-A of the old Civil Code on sale of personal property by installment]. xxx
Being leases of personal property with option to purchase as contemplated in the above article, the contracts in
question are subject to the provision that when the lessor in such case "has chosen to deprive the lessee of the
enjoyment of such personal property," "he shall have no further action" against the lessee "for the recovery of any
unpaid balance" owing by the latter, "agreement to the contrary being null and void."
In choosing, through replevin, to deprive the respondent of possession of the leased equipment, the petitioner
waived its right to bring an action to recover unpaid rentals on the said leased items. Paragraph (3), Article 1484 in
relation to Article 1485 of the Civil Code, which we are hereunder re-reproducing, cannot be any clearer.
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:
xxx
xxx
xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to
pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover
any unpaid balance of the price. Any agreement to the contrary shall be void.
ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.
23
As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals, the remedies provided for in Article
1484 of the Civil Code are alternative, not cumulative. The exercise of one bars the exercise of the others. This
limitation applies to contracts purporting to be leases of personal property with option to buy by virtue of the
same Article 1485. The condition that the lessor has deprived the lessee of possession or enjoyment of the thing
for the purpose of applying Article 1485 was fulfilled in this case by the filing by petitioner of the complaint for a
24
sum of money with prayer for replevin to recover possession of the office equipment. By virtue of the writ of
seizure issued by the trial court, the petitioner has effectively deprived respondent of their use, a situation which,
by force of the Recto Law, in turn precludes the former from maintaining an action for recovery of "accrued
25
rentals" or the recovery of the balance of the purchase price plus interest.
The imperatives of honest dealings given prominence in the Civil Code under the heading: Human Relations,
provide another reason why we must hold the petitioner to its word as embodied in its demand letter. Else, we
would witness a situation where even if the respondent surrendered the equipment voluntarily, the petitioner can
still sue upon its claim. This would be most unfair for the respondent. We cannot allow the petitioner to renege on
its word. Yet more than that, the very word "or" as used in the letter conveys distinctly its intention not to claim
both the unpaid balance and the equipment. It is not difficult to discern why: if we add up the amounts paid by the
respondent, the residual value of the property recovered, and the amount claimed by the petitioner as sued upon
herein (for a total of P21,779,029.47), then it would end up making an instant killing out of the transaction at the
expense of its client, the respondent. The Recto Law was precisely enacted to prevent this kind of aberration.
Moreover, due to considerations of equity, public policy and justice, we cannot allow this to
happen.1avvphil.zw+ Not only to the respondent, but those similarly situated who may fall prey to a similar
scheme.
WHEREFORE, the instant petition is DENIED and the trial courts decision is AFFIRMED.
Costs against petitioner.
SO ORDERED.
CANCIO
C.
GARCIA
Associate Justice

G.R. No. 93176 April 22, 1994

SISKA
DEVELOPMENT
CORPORATION, petitioner,
vs.
OFFICE OF THE PRESIDENT OF THE PHILIPPINES, and SPOUSES JOSE and SOCORRO SERING,respondents.
Abella, Lazaro & Romero for petitioner.
Jose A. Beltran for private respondents.
QUIASON, J.:
This
is
a
petition
for certiorari under
Rule
65
of
the
Revised
Rules
of
Court
to
review,
reverse,
and
set
aside
Resolution
No.
3376
dated
November 25, 1988 and the Order dated December 6, 1989 of the Office of the President of the Philippines.
In Resolution No. 3376, the Office of the President reversed the resolution of the Human Settlements Regulatory
Commission (HSRC) and directed petitioner to execute a final deed of sale on the lot covered by the Contract to
Sell in favor of private respondents upon payment of the unpaid balance of P9,341.24.
In the Order dated December 8, 1989, the Office of the President denied the motion for reconsideration of the said
resolution.

We affirm the said Resolution and Order.

I
On April 28, 1967, petitioner, a subdivision owner-developer, entered into a Contract to Sell with Guadalupe
Sering, involving a lot situated at the Mira-Nila Subdivision in Quezon City.
On August 16, 1968, Guadalupe Sering, with the consent of petitioner, transferred all her rights and interests over
the aforesaid lot in favor of respondent Socorro Sering, wife of respondent Jose Sering. Thereafter, private
respondents assumed the transferor's obligation by paying the monthly amortizations for the lot.
On several occasions, private respondents defaulted in the payment of their monthly amortizations, but petitioner
still accepted the late payments.
On October 18, 1974, petitioner sent private respondents a notice of rescission of the Contract to Sell for failure to
pay the monthly amortizations on time. Petitioner, however, cancelled the said notice of rescission on
November 12, 1974, after private respondents updated their payments. Petitioner, however, imposed the
condition that private respondents' account "must be kept current" and that should it be necessary to rescind the
contract for a second time, the second rescission would be final. Private respondents again defaulted in paying
their monthly amortizations from January to September 1, 1975. When respondent Jose Sering offered to pay the
remaining balance of the purchase price on September 18, 1975, an employee of petitioner refused to accept the
payment, alleging that the contract had already been cancelled. However, said respondent protested that he had
not received any notice of rescission from petitioner.
To compel the execution by petitioner of the final deed of sale, private respondents filed an action for specific
performance in the Court of First Instance of Surigao. Petitioner questioned the order of the trial court, upholding
the venue, before the Court of Appeals, which in turn ruled for petitioner and dismissed the case.
Private respondents filed another case in the Court of First Instance of Quezon City, but said court dismissed the
case
on
the
grounds
that
under
P.D. No. 957, it was the National Housing Authority (NHA) that had exclusive jurisdiction over the action. Hence,
another complaint was filed with the NHA.
The case was later transferred to the HSRC by virtue of Executive Order No. 648 dated Feb. 7, 1981 (HSRC Case No.
REM-A-0156). After hearing, the Office of Appeals Adjudication and Legal Affairs (OAALA) of the HSRC denied
private respondents' request for specific performance of the Contract to Sell and directed petitioner to refund to
private respondents the amount of P15,960.73.
Their motion for reconsideration having been denied, private respondents appealed the OAALA decision to the
HSRC. In a resolution dated May 16, 1986, the HSRC dismissed private respondents' appeal for lack of merit and
affirmed the decision of the OAALA. Dissatisfied with the HSRC resolution, private respondents elevated the case
to the Office of the President.
On November 23, 1988, the Office of the President ruled as follows:
Clearly, it could be gleaned from the foregoing payment record of appellants that appellee
tolerated, in not just one but in several instances, late and delayed payments by the former
when it accepted updated payments covering past due accounts. Thus, it would be grossly unfair
and unjustified for appellee to refuse to accept the last payment for the remaining balance in
order to cancel the contract to sell on the ground of delay. If such be the case, the contract could
have been cancelled on several occasions, yet appellee continued receiving late payments, save
for the last one where it vigorously insisted on cancelling the contract due to delayed payments
by appellants who readily offered to settle the whole balance.
Second, receipt of the notice of rescission adverted to by appellee as having been sent to
appellants remains doubtful, as appellee failed to show proof of service thereof to appellants. It
must be remembered that when Jose Sering went to appellee's office on September 18, 1975 to
pay the whole unpaid balance of the purchase price, appellee's representative, a certain Mr.
Valenzuela, did not inform Jose Sering that a notice of rescission had earlier been prepared. It
must be stressed at this point that said notice of rescission serves no real purpose if the same
was not actually received by appellants. Hence, Jose Sering would not have gone to appellee's
office to pay the last balance had he known earlier of the notice of rescission.
Consequently, appellee is now estopped to insist on rescinding the contract to sell by the mere
expedience of refusing to accept the last payment on the ground of delay when it has, in several
instances, accepted delayed payments from appellants. There is here an evident bad faith on

appellee's part in taking undue advantage of appellant's last delayed payment by invoking
Section 6 of the Contract to Sell. To allow such a situation to arise would enable appellee to
enrich itself at the expense of appellants. Under the circumstances, it is but fair that the original
intention of the contracting parties should be made to prevail, that is, for the vendor subdivision
developer
to
transfer
all
the
rights
and
interest
on
the
land
to appellants upon payment by the latter of the whole purchase price (Rollo, pp. 38-39).
Hence, this petition.
II
Petitioner assigns the following errors:
FIRST WHETHER OR NOT THE RESPONDENT OFFICE OF THE PRESIDENT COMMITTED A GRAVE
ABUSE OF DISCRETION IN FINDING THAT THE NOTICE OF RESCISSION SENT BY THE PETITIONER
TO THE RESPONDENT SPOUSES SERVED NO REAL PURPOSE SINCE IT WAS NOT RECEIVED BY THE
LATTER.
SECOND WHETHER OR NOT THE RESPONDENT OFFICE OF THE PRESIDENT COMMITTED A
GRAVE ABUSE OF DISCRETION IN FINDING THAT THE PETITIONER IS NOW ESTOPPED FROM
INSISTING ON THE RESCISSION OF THE CONTRACT TO SELL WHEN IT HAD ON SEVERAL
OCCASIONS ACCEPTED THE DELAYED PAYMENTS OF THE RESPONDENT SPOUSES.
THIRD WHETHER OR NOT THE RESPONDENT OFFICE OF THE PRESIDENT COMMITTED A GRAVE
ABUSE OF DISCRETION IN ORDERING THE PETITIONER TO ACCEPT THE SUM OF P9,341.24 AS
FULL PAYMENT FROM THE RESPONDENT SPOUSES AND THEREAFTER TO ISSUE THE FINAL DEED
OF SALE (Rollo, pp. 4-5).
The Office of the President found that private respondents never received the notice of rescission sent by
petitioner. This is a finding of fact of an administrative agency which we shall not disturb (Chong Guan Trading v.
National Labor Relations Commission, 172 SCRA 831 [1989]).
Petitioner, however, claims that a notice of rescission is not necessary under paragraph 6 of the contract, which
provides:
6. Failure to Pay Installments.- In case the BUYER fails to satisfy any monthly installment, or any
other payments herein agreed upon, an interest of 1% per month will be charged on the amount
he should have paid. Should a period of ninety (90) days elapse from the time of default, and the
BUYER has not paid all amounts he should have paid with the corresponding interest up to that
date then this contract shall automatically and without any further formality, become null and
void (Rollo, p. 12).
The
sending
of
a
notice
of
cancellation
to
the
buyer
is
mandated
by
R.A. 6552 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments," (the Maceda
Law) which took effect on September 14, 1972 (Jison v. Court of Appeals, 164 SCRA 339 [1988]). In Section 3(b)
thereof, it provides that "the actual cancellation of the contract shall take place thirty days from receipt of the
buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer."
Petitioner argues that the relationship between the parties is governed solely by the Contract to Sell because said
contract was entered into long before the passage of the Maceda Law (Rollo, p. 7).
Without expressly stating so, petitioner's line of argument invokes the non-impairment clause of the Constitution
(Art. III, Sec. 10). The purpose of said clause is to safeguard the integrity of contracts against unwarranted
interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change
or modify the rights and obligations of the parties. As noted by Justice Isagani A. Cruz "[T]he will of the obligor and
obligee must be observed; the obligation of their contract must not be impaired" (Constitutional Law, 1991 ed., p.
239).
Impairment is anything that diminishes the efficacy of the contract. There is an impairment if a subsequent law
changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon
or withdraws remedies for the enforcement of the rights of the parties (Clemons v. Nolting,
42 Phil. 702 [1922]).
The requirement of notice of the rescission under the Maceda Law does not change the time or mode of
performance or impose new conditions or dispense with the stipulations regarding the binding effect of the

contract. Neither does it withdraw the remedy for its enforcement. At most, it merely provides for a procedure in
aid of the remedy of rescission.
While the contract was entered into before the effectivity of the Maceda Law, the rescission took place when the
said law was in full force and effect. But even before the effectivity of said law, jurisprudence made necessary a
notice of rescission.
While juridical action for the rescission of a contract is not necessary where the contract provides that it may be
revoked and cancelled for violation of any of its terms and conditions, jurisprudence requires that a written notice
be sent to the defaulter informing him of the rescission (Palay, Inc. v. Clave,
124 SCRA 638 [1983]). As stressed in University of the Philippines v. Walfrido De los Angeles 35 SCRA 102 (1970),
the act of the party in treating a contract as cancelled should be made known to the other.
Anent the second issue, according to petitioner, if ever on several occasions it accepted the delayed payments of
private respondents, then that must not be considered a waiver or estoppel on its part. Petitioner invokes
paragraph 9 of the contract, which provides:
9. Effect of failure to enforce provision. That whatever consideration the Owner may concede
to the Buyer as not exacting a strict compliance with any of the terms and conditions of this
contract, as well as any other condonation that the Owner may give to the Buyer with regard to
the obligations of the latter, shall not be interpreted as a renunciation on the part of the Owner
of any rights granted it under this contract in case of any default or non-compliance by the Buyer
(Rollo, p. 8).
The Contract to Sell entered into by the parties has some characteristics of a contract of adhesion. The petitioner
drafted and prepared the contract. Private respondents, who were eager to acquire a lot upon which they could
build a home, affixed their signatures thereon and assented to the terms and conditions of the contract. They had
no opportunity to question nor change any of the terms of the agreement. It was offered to them on a take-it-orleave-it basis (Angeles v. Calasanz, 135 SCRA 323 [1985]).
When petitioner accepted and received delayed payments beyond the grace period mentioned in paragraph 9 of
the contract, it waived its right to rescind and is now estopped from exercising it (Angeles v. Calasanz, supra).
Anent the third issue, unilateral cancellation of a contract to sell is not warranted if the breach is slight or casual
(Song Fo & Co. v. Hawaii-Philippine Co., 47 Phil. 821 [1925]). The breach of the contract adverted to by petitioner
was so slight considering that private respondents had already paid P26,601.21 (inclusive of interests and
penalties) out of the total purchase price of P21,328.00 and the remaining balance was only P9,341.24, which
private respondents were willing to pay. To sanction the rescission made by petitioner will work injustice to private
respondents. It would unjustly enrich petitioner at their expense (Civil Code of the Philippines, Art. 22).
WHEREFORE, the petition is DISMISSED. Petitioner is ordered to accept the amount of P9,341.29, the balance of
the purchase price and to execute immediately the final deed of sale in favor of private respondents.
No pronouncement as to costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Vitug and
Kapunan, JJ., concur.

G.R. No. 147695

September 13, 2007
MANUEL
C.
PAGTALUNAN, petitioner,
vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court of the Court of Appeals (CA) Decision
promulgated on October 30, 2000 and its Resolution dated March 23, 2001 denying petitioners motion for

reconsideration. The Decision of the CA affirmed the Decision of the Regional Trial Court (RTC) of Malolos, Bulacan,
dated June 25, 1999 dismissing the case of unlawful detainer for lack of merit.
The facts are as follows:
On July 19, 1974, Patricio Pagtalunan (Patricio), petitioners stepfather and predecessor-in-interest, entered into a
Contract to Sell with respondent, wife of Patricios former mechanic, Teodoro Manzano, whereby the former
agreed to sell, and the latter to buy, a house and lot which formed half of a parcel of land, covered by Transfer
Certificate of Title (TCT) No. T-10029 (now TCT No. RT59929 [T-254773]), with an area of 236 square meters. The
consideration of P17,800 was agreed to be paid in the following manner: P1,500 as downpayment upon execution
of the Contract to Sell, and the balance to be paid in equal monthly installments of P150 on or before the last day
of each month until fully paid.
It was also stipulated in the contract that respondent could immediately occupy the house and lot; that in case of
default in the payment of any of the installments for 90 days after its due date, the contract would be
automatically rescinded without need of judicial declaration, and that all payments made and all improvements
done on the premises by respondent would be considered as rentals for the use and occupation of the property or
payment for damages suffered, and respondent was obliged to peacefully vacate the premises and deliver the
possession thereof to the vendor.
Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after December 1979 without
1
any justification or explanation. Moreover, in a "Kasunduan" dated November 18, 1979, respondent
borrowed P3,000 from Patricio payable in one year either in one lump sum payment or by installments, failing
which the balance of the loan would be added to the principal subject of the monthly amortizations on the land.
Lastly, petitioner asserted that when respondent ceased paying her installments, her status of buyer was
automatically transformed to that of a lessee. Therefore, she continued to possess the property by mere tolerance
of Patricio and, subsequently, of petitioner.
On the other hand, respondent alleged that she paid her monthly installments religiously, until sometime in 1980
when Patricio changed his mind and offered to refund all her payments provided she would surrender the house.
She refused. Patricio then started harassing her and began demolishing the house portion by portion. Respondent
admitted that she failed to pay some installments after December 1979, but that she resumed paying in 1980 until
her balance dwindled to P5,650. She claimed that despite several months of delay in payment, Patricio never sued
for ejectment and even accepted her late payments.
Respondent also averred that on September 14, 1981, she and Patricio signed an agreement (Exh. 2) whereby he
consented to the suspension of respondents monthly payments until December 1981. However, even before the
lapse of said period, Patricio resumed demolishing respondents house, prompting her to lodge a complaint with
the Barangay Captain who advised her that she could continue suspending payment even beyond December 31,
1981 until Patricio returned all the materials he took from her house. This Patricio failed to do until his death.
Respondent did not deny that she still owed Patricio P5,650, but claimed that she did not resume paying her
monthly installment because of the unlawful acts committed by Patricio, as well as the filing of the ejectment case
against her. She denied having any knowledge of the Kasunduan of November 18, 1979.
Patricio and his wife died on September 17, 1992 and on October 17, 1994, respectively. Petitioner became their
sole successor-in-interest pursuant to a waiver by the other heirs. On March 5, 1997, respondent received a letter
from petitioners counsel dated February 24, 1997 demanding that she vacate the premises within five days on the
ground that her possession had become unlawful. Respondent ignored the demand. The Punong Barangay failed
to settle the dispute amicably.
On April 8, 1997, petitioner filed a Complaint for unlawful detainer against respondent with the Municipal Trial
Court (MTC) of Guiguinto, Bulacan praying that, after hearing, judgment be rendered ordering respondent to
immediately vacate the subject property and surrender it to petitioner; forfeiting the amount of P12,950 in favor
of petitioner as rentals; ordering respondent to pay petitioner the amount of P3,000 under the Kasunduan and the
amount of P500 per month from January 1980 until she vacates the property, and to pay petitioner attorneys fees
and the costs.
On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated that although the Contract to
Sell provides for a rescission of the agreement upon failure of the vendee to pay any installment, what the contract
actually allows is properly termed a resolution under Art. 1191 of the Civil Code.
The MTC held that respondents failure to pay not a few installments caused the resolution or termination of the
Contract to Sell. The last payment made by respondent was on January 9, 1980 (Exh. 71). Thereafter, respondents

right of possession ipso facto ceased to be a legal right, and became possession by mere tolerance of Patricio and
his successors-in-interest. Said tolerance ceased upon demand on respondent to vacate the property.
The dispositive portion of the MTC Decision reads:
Wherefore, all the foregoing considered, judgment is hereby rendered, ordering the defendant:
a. to vacate the property covered by Transfer Certificate of Title No. T-10029 of the Register of
Deeds of Bulacan (now TCT No. RT-59929 of the Register of Deeds of Bulacan), and to surrender
possession thereof to the plaintiff;
b. to pay the plaintiff the amount of P113,500 representing rentals from January 1980 to the
present;
c. to pay the plaintiff such amount of rentals, at P500/month, that may become due after the
date of judgment, until she finally vacates the subject property;
d. to pay to the plaintiff the amount of P25,000 as attorneys fees.
2
SO ORDERED.
On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed the decision of the MTC and
dismissed the case for lack of merit. According to the RTC, the agreement could not be automatically rescinded
since there was delivery to the buyer. A judicial determination of rescission must be secured by petitioner as a
condition precedent to convert the possession de facto of respondent from lawful to unlawful.
The dispositive portion of the RTC Decision states:
WHEREFORE, judgment is hereby rendered reversing the decision of the Municipal Trial Court of
3
Guiguinto, Bulacan and the ejectment case instead be dismissed for lack of merit.
The motion for reconsideration and motion for execution filed by petitioner were denied by the RTC for lack of
merit in an Order dated August 10, 1999.
Thereafter, petitioner filed a petition for review with the CA.
In a Decision promulgated on October 30, 2000, the CA denied the petition and affirmed the Decision of the RTC.
The dispositive portion of the Decision reads:
WHEREFORE, the petition for review on certiorari is Denied. The assailed Decision of the Regional Trial
Court of Malolos, Bulacan dated 25 June 1999 and its Order dated 10 August 1999 are hereby AFFIRMED.
4
SO ORDERED.
The CA found that the parties, as well as the MTC and RTC failed to advert to and to apply Republic Act (R.A.) No.
6552, more commonly referred to as the Maceda Law, which is a special law enacted in 1972 to protect buyers of
real estate on installment payments against onerous and oppressive conditions.
The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of R.A. No. 6552, and
recognized respondents right to continue occupying unmolested the property subject of the contract to sell.
The CA denied petitioners motion for reconsideration in a Resolution dated March 23, 2001.
Hence, this petition for review on certiorari.
Petitioner contends that:
A. Respondent Dela Cruz must bear the consequences of her deliberate withholding of, and refusal to pay,
the monthly payment. The Court of Appeals erred in allowing Dela Cruz who acted in bad faith from
benefiting under the Maceda Law.
B. The Court of Appeals erred in resolving the issue on the applicability of the Maceda Law, which issue
was not raised in the proceedings a quo.
C. Assuming arguendo that the RTC was correct in ruling that the MTC has no jurisdiction over a rescission
5
case, the Court of Appeals erred in not remanding the case to the RTC for trial.
Petitioner submits that the Maceda Law supports and recognizes the right of vendors of real estate to cancel the
sale outside of court, without need for a judicial declaration of rescission, citing Luzon Brokerage Co., Inc., v.
6
Maritime Building Co., Inc.
Petitioner contends that respondent also had more than the grace periods provided under the Maceda Law within
7
which to pay. Under Sec. 3 of the said law, a buyer who has paid at least two years of installments has a grace
period of one month for every year of installment paid. Based on the amount of P12,950 which respondent had
already paid, she is entitled to a grace period of six months within which to pay her unpaid installments after
December, 1979. Respondent was given more than six months from January 1980 within which to settle her
unpaid installments, but she failed to do so. Petitioners demand to vacate was sent to respondent in February
1997.

There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right to pay arrearages after the
grace periods have lapsed, in the event of an invalid demand for rescission. The Maceda Law only provides that
actual cancellation shall take place after 30 days from receipt of the notice of cancellation or demand for rescission
and upon full payment of the cash surrender value to the buyer.
Petitioner contends that his demand letter dated February 24, 1997 should be considered the notice of
cancellation since the demand letter informed respondent that she had "long ceased to have any right to possess
the premises in question due to [her] failure to pay without justifiable cause." In support of his contention, he
8
cited Layug v. Intermediate Appellate Court which held that "the additional formality of a demand on *the sellers+
part for rescission by notarial act would appear, in the premises, to be merely circuitous and consequently
superfluous." He stated that in Layug, the seller already made a written demand upon the buyer.
In addition, petitioner asserts that whatever cash surrender value respondent is entitled to have been applied and
must be applied to rentals for her use of the house and lot after December, 1979 or after she stopped payment of
her installments.
Petitioner argues that assuming Patricio accepted respondents delayed installments in 1981, such act cannot
prevent the cancellation of the Contract to Sell. Installments after 1981 were still unpaid and the applicable grace
periods under the Maceda Law on the unpaid installments have long lapsed. Respondent cannot be allowed to
hide behind the Maceda Law. She acted with bad faith and must bear the consequences of her deliberate
withholding of and refusal to make the monthly payments.
Petitioner also contends that the applicability of the Maceda Law was never raised in the proceedings below;
hence, it should not have been applied by the CA in resolving the case.
The Court is not persuaded.
The CA correctly ruled that R.A No. 6552, which governs sales of real estate on installment, is applicable in the
resolution of this case.
This case originated as an action for unlawful detainer. Respondent is alleged to be illegally withholding possession
of the subject property after the termination of the Contract to Sell between Patricio and respondent. It is,
therefore, incumbent upon petitioner to prove that the Contract to Sell had been cancelled in accordance with R.A.
No. 6552.
The pertinent provision of R.A. No. 6552 reads:
Sec. 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four as amended
by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years
of installments, the buyer is entitled to the following rights in case he defaults in the payment of
succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace period earned
by him, which is hereby fixed at the rate of one month grace period for every one year of installment
payments made: Provided, That this right shall be exercised by the buyer only once in every five years of
the life of the contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty percent of the total payments made and, after five years of
installments, an additional five percent every year but not to exceed ninety percent of the total payments
made: Provided, That the actual cancellation of the contract shall take place after thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a
9
notarial act and upon full payment of the cash surrender value to the buyer.
R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," recognizes in conditional sales of
all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon nonpayment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to
10
convey title from acquiring binding force. The Court agrees with petitioner that the cancellation of the Contract
to Sell may be done outside the court particularly when the buyer agrees to such cancellation.
However, the cancellation of the contract by the seller must be in accordance with Sec. 3 (b) of R.A. No. 6552,
which requires a notarial act of rescission and the refund to the buyer of the full payment of the cash surrender
value of the payments on the property. Actual cancellation of the contract takes place after 30 days from receipt

by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon
full payment of the cash surrender value to the buyer.
Based on the records of the case, the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of R.A.
No. 6552.
First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without canceling the Contract to
Sell.
Second, petitioner also failed to cancel the Contract to Sell in accordance with law.
Petitioner contends that he has complied with the requirements of cancellation under Sec. 3 (b) of R.A. No. 6552.
He asserts that his demand letter dated February 24, 1997 should be considered as the notice of cancellation or
demand for rescission by notarial act and that the cash surrender value of the payments on the property has been
applied to rentals for the use of the house and lot after respondent stopped payment after January 1980.
11
The Court, however, finds that the letter dated February 24, 1997, which was written by petitioners counsel,
merely made formal demand upon respondent to vacate the premises in question within five days from receipt
thereof since she had "long ceased to have any right to possess the premises x x x due to [her] failure to pay
without justifiable cause the installment payments x x x."
Clearly, the demand letter is not the same as the notice of cancellation or demand for rescission by a notarial
12
act required by R.A No. 6552. Petitioner cannot rely on Layug v. Intermediate Appellate Court to support his
contention that the demand letter was sufficient compliance. Layug held that "the additional formality of a
demand on *the sellers+ part for rescission by notarial act would appear, in the premises, to be merely circuitous
and consequently superfluous" since the seller therein filed an action for annulment of contract,which is a kindred
13
concept of rescission by notarial act. Evidently, the case of unlawful detainer filed by petitioner does not exempt
him from complying with the said requirement.
In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on the property
to the buyer before cancellation of the contract. The provision does not provide a different requirement for
contracts to sell which allow possession of the property by the buyer upon execution of the contract like the
instant case. Hence, petitioner cannot insist on compliance with the requirement by assuming that the cash
surrender value payable to the buyer had been applied to rentals of the property after respondent failed to pay
the installments due.
There being no valid cancellation of the Contract to Sell, the CA correctly recognized respondents right to continue
occupying the property subject of the Contract to Sell and affirmed the dismissal of the unlawful detainer case by
the RTC.
The Court notes that this case has been pending for more than ten years. Both parties prayed for other reliefs that
are just and equitable under the premises. Hence, the rights of the parties over the subject property shall be
resolved to finally dispose of that issue in this case.
Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during his lifetime or by petitioner
in accordance with R.A. No. 6552 when petitioner filed this case of unlawful detainer after 22 years of continuous
possession of the property by respondent who has paid the substantial amount of P12,300 out of the purchase
price of P17,800, the Court agrees with the CA that it is only right and just to allow respondent to pay her arrears
and settle the balance of the purchase price.
For respondents delay in the payment of the installments, the Court, in its discretion, and applying Article
14
15
2209 of the Civil Code, may award interest at the rate of 6% per annum on the unpaid balance considering that
there is no stipulation in the Contract to Sell for such interest. For purposes of computing the legal interest, the
reckoning period should be the filing of the complaint for unlawful detainer on April 8, 1997.
16
Based on respondents evidence of payments made, the MTC found that respondent paid a total of P12,300 out
of the purchase price of P17,800. Hence, respondent still has a balance of P5,500, plus legal interest at the rate of
6% per annum on the unpaid balance starting April 8, 1997.
The third issue is disregarded since petitioner assails an inexistent ruling of the RTC on the lack of jurisdiction of
the MTC over a rescission case when the instant case he filed is for unlawful detainer.
WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining the dismissal of the unlawful
detainer case by the RTC is AFFIRMED with the following MODIFICATIONS:
1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner Manuel C. Pagtalunan the balance
of the purchase price in the amount of Five Thousand Five Hundred Pesos (P5,500) plus interest at 6% per

annum from April 8, 1997 up to the finality of this judgment, and thereafter, at the rate of 12% per
annum;
2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed of Absolute Sale of the subject
property and deliver the certificate of title in favor of respondent Rufina Dela Cruz Vda. de Manzano; and
3. In case of failure to pay within 60 days from finality of this Decision, respondent Rufina Dela Cruz Vda.
de Manzano shall immediately vacate the premises without need of further demand, and the
downpayment and installment payments of P12,300 paid by her shall constitute rental for the subject
property.
No costs.
SO ORDERED.
Puno, C.J., Chairperson, Sandoval-Gutierrez, Corona, Garcia, JJ., concur.

G.R. No. 195619

September 5, 2012
PLANTERS
DEVELOPMENT
BANK, Petitioner,
vs.
JULIE CHANDUMAL, Respondent.
DECISION
REYES, J.:
In this petition for review under Rule 45 of the Rules of Court, Planters Development Bank (PDB) questions the
1
2
Decision dated July 27, 2010 of the Court of Appeals (CA), as well as its Resolution dated February 16, 2011,
denying the petitioner's motion for reconsideration in CA-G.R. CV No. 82861. The assailed decision nullified the
3
Decision dated May 31, 2004 of the Regional Trial Court (RTC), Las Pias City, Branch 255 in Civil Case No. LP-990137.
Antecedent Facts
The instant case stemmed from a contract to sell a parcel of land, together with improvements, between BF
Homes, Inc. (BF Homes) and herein respondent Julie Chandumal (Chandumal). The property subject of the contract
is located in Talon Dos, Las Pias City and covered by Transfer Certificate of Title No. T-10779. On February 12,
1993, BF Homes sold to PDB all its rights, participations and interests over the contract.
Chandumal paid her monthly amortizations from December 1990 until May 1994 when she began to default in her
4
payments. In a Notice of Delinquency and Rescission of Contract with Demand to Vacate dated July 14, 1998, PDB
gave Chandumal a period of thirty (30) days from receipt within which to settle her installment arrearages
together with all its increments; otherwise, all her rights under the contract shall be deemed extinguished and
terminated and the contract declared as rescinded. Despite demand, Chandumal still failed to settle her obligation.
On June 18, 1999, an action for judicial confirmation of notarial rescission and delivery of possession was filed by
PDB against Chandumal, docketed as Civil Case No. LP-99-0137. PDB alleged that despite demand, Chandumal
failed and/or refused to pay the amortizations as they fell due; hence, it caused the rescission of the contract by
5
means of notarial act, as provided in Republic Act (R.A.) No. 6552. According to PDB, it tried to deliver the cash
surrender value of the subject property, as required under R.A. No. 6552, in the amount of P10,000.00; however,
6
the defendant was unavailable for such purpose.
Consequently, summons was issued and served by deputy sheriff Roberto T. Galing (Sheriff Galing). According to
his return, Sheriff Galing attempted to personally serve the summons upon Chandumal on July 15, 19 and 22, 1999
but it was unavailing as she was always out of the house on said dates. Hence, the sheriff caused substituted
service of summons on August 5, 1999 by serving the same through Chandumals mother who acknowledged
7
receipt thereof.
For her failure to file an answer within the prescribed period, PDB filed on April 24, 2000 an ex parte motion to
8
declare Chandumal in default. On January 12, 2001, the RTC issued an Order granting the motion of PDB.
On February 23, 2001, Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit Attached
Answer. She maintained that she did not receive the summons and/or was not notified of the same. She further

alleged that her failure to file an answer within the reglementary period was due to fraud, mistake or excusable
negligence. In her answer, Chandumal alleged the following defenses: (a) contrary to the position of PDB, the latter
did not make any demand for her to pay the unpaid monthly amortization; and (b) PDB did not tender or offer to
give the cash surrender value of the property in an amount equivalent to fifty percent (50%) of the actual total
payment made, as provided for under Section 3(b) of R.A. No. 6552. Moreover, Chandumal claimed that since the
total payment she made amounts to P 782,000.00, the corresponding cash surrender value due her should
9
be P 391,000.00.
10
Per Order dated August 2, 2001, the RTC denied Chandumals motion to set aside the order of default. Her
11
motion for reconsideration was also denied for lack of merit. Conformably, the RTC allowed PDB to present its
12
evidence ex parte. On May 31, 2004, the RTC rendered a
13
Decision in favor of PDB, the dispositive portion of which reads:
WHEREFORE, the foregoing considered, judgment is hereby rendered in favor of the plaintiff Planters Development
Bank and against defendant Julie Chandumal as follows, to wit:
1. Declaring the notarial rescission of the Contract to Sell dated 03 January 1990 made by the plaintiff per the
Notice of Delinquency and Rescission of Contract with Demand to Vacate dated 14 July 1998 as judicially
confirmed and ratified;
2. Requiring the plaintiff to deposit in the name of the defendant the amount of P 10,000.00 representing the cash
surrender value for the subject property with the Land Bank of the Philippines, Las Pi[]as City Branch in
satisfaction of the provisions of R.A. No. 6552; and,
3. Ordering the defendant to pay the plaintiff the amount of P 50,000.00 as and by way of attorneys fees,
including the costs of suit.
14
SO ORDERED.
From the foregoing judgment, Chandumal appealed to the CA.
On July 27, 2010, the CA, without ruling on the propriety of the judicial confirmation of the notarial rescission,
rendered the assailed decision nullifying the RTC decision due to invalid and ineffective substituted service of
summons. The dispositive portion of the CA decision provides:
WHEREFORE, premises considered, the decision of Branch 255 of the Regional Trial Court of Las Pias City, dated
May 31, 2004, in Civil Case No. LP-99-0137 is hereby NULLIFIED andVACATED.
15
SO ORDERED.
PDB filed a motion for reconsideration but it was denied by the CA in its Resolution dated February 16, 2011.
Hence, this petition based on the following assignment of errors:
I
The Honorable Court of Appeals erred in reversing the decision of the trial court on the ground of improper service
of summons;
II
The decision of the trial court is valid as it duly acquired jurisdiction over the person of respondent Chandumal
through voluntary appearance; and
III
16
The trial court did not err in confirming and ratifying the notarial rescission of the subject contract to sell.
PDB contends that the RTC properly acquired jurisdiction over the person of Chandumal.1wphi1 According to
PDB, there was proper service of summons since the sheriff complied with the proper procedure governing
substituted service of summons as laid down in Section 7, Rule 14 of the Rules of Court. PDB alleges that it is clear
from the sheriffs return that there were several attempts on at least three (3) different dates to effect personal
service within a reasonable period of nearly a month, before he caused substituted service of summons. The
sheriff likewise stated the reason for his failure to effect personal service and that on his fourth attempt, he
effected the service of summons through Chandumals mother who is unarguably, a person of legal age and with
sufficient discretion. PDB also argues that Chandumal voluntarily submitted herself to the jurisdiction of the court
when she filed an Urgent Motion to Set Aside Order of Default and to Admit Attached Answer.
For her part, Chandumal asserts that she never received a copy of the summons or was ever notified of it and she
only came to know of the case sometime in July or August 2000, but she was already in the United States of
America by that time, and that the CA correctly ruled that there was no valid service of summons; hence, the RTC
never acquired jurisdiction over her person.
Issues

1. Whether there was a valid substituted service of summons;

2. Whether Chandumal voluntarily submitted to the jurisdiction of the trial court; and
3. Whether there was proper rescission by notarial act of the contract to sell.
Our Ruling
The fundamental rule is that jurisdiction over a defendant in a civil case is acquired either through service of
summons or through voluntary appearance in court and submission to its authority. If a defendant has not been
properly summoned, the court acquires no jurisdiction over its person, and a judgment rendered against it is null
17
and void.
18
Where the action is in personam and the defendant is in the Philippines, service of summons may be made
through personal service, that is, summons shall be served by handing to the defendant in person a copy thereof,
19
or if he refuses to receive and sign for it, by tendering it to him. If the defendant cannot be personally served
20
with summons within a reasonable time, it is then that substituted service may be made. Personal service of
summons should and always be the first option, and it is only when the said summons cannot be served within a
21
reasonable time can the process server resort to substituted service.
No
valid
substituted
service
of
summons
In this case, the sheriff resorted to substituted service of summons due to his failure to serve it personally. In
22
Manotoc v. Court of Appeals, the Court detailed the requisites for a valid substituted service of summons,
summed up as follows: (1) impossibility of prompt personal service the party relying on substituted service or the
sheriff must show that the defendant cannot be served promptly or there is impossibility of prompt service; (2)
specific details in the return the sheriff must describe in the Return of Summons the facts and circumstances
surrounding the attempted personal service; (3) a person of suitable age and discretion the sheriff must
determine if the person found in the alleged dwelling or residence of defendant is of legal age, what the recipients
relationship with the defendant is, and whether said person comprehends the significance of the receipt of the
summons and his duty to immediately deliver it to the defendant or at least notify the defendant of said receipt of
summons, which matters must be clearly and specifically described in the Return of Summons; and (4) a
competent person in charge, who must have sufficient knowledge to understand the obligation of the defendant in
23
the summons, its importance, and the prejudicial effects arising from inaction on the summons. These were
24
reiterated and applied in Pascual v. Pascual, where the substituted service of summon made was invalidated due
to the sheriffs failure to specify in the return the necessary details of the failed attempts to effect personal service
which would justify resort to substituted service of summons.
In applying the foregoing requisites in the instant case, the CA correctly ruled that the sheriffs return failed to
justify a resort to substituted service of summons. According to the CA, the Return of Summons does not
specifically show or indicate in detail the actual exertion of efforts or any positive step taken by the officer or
process server in attempting to serve the summons personally to the defendant. The return merely states the
alleged whereabouts of the defendant without indicating that such information was verified from a person who
25
had knowledge thereof. Indeed, the sheriffs return shows a mere perfunctory attempt to cause personal service
of the summons on Chandumal. There was no indication if he even asked Chandumals mother as to her specific
whereabouts except that she was "out of the house", where she can be reached or whether he even tried to await
her return. The "efforts" exerted by the sheriff clearly do not suffice to justify substituted service and his failure to
26
comply with the requisites renders such service ineffective.
Respondent
voluntarily
submitted
to the jurisdiction of the trial court
Despite that there was no valid substituted service of summons, the Court, nevertheless, finds that Chandumal
voluntarily submitted to the jurisdiction of the trial court.
Section 20, Rule 14 of the Rules of Court states:
Sec. 20. Voluntary appearance. The defendants voluntary appearance in the action shall be equivalent to service
of summons. The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person
of the defendant shall not be deemed a voluntary appearance.
When Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit Attached Answer, she
effectively submitted her person to the jurisdiction of the trial court as the filing of a pleading where one seeks an
affirmative relief is equivalent to service of summons and vests the trial court with jurisdiction over the
defendants person. Thus, it was ruled that the filing of motions to admit answer, for additional time to file answer,

for reconsideration of a default judgment, and to lift order of default with motion for reconsideration is considered
27
voluntary submission to the trial courts jurisdiction. The Court notes that aside from the allegation that she did
not receive any summons, Chandumals motion to set aside order of default and to admit attached answer failed
to positively assert the trial courts lack of jurisdiction. In fact, what was set forth therein was the substantial claim
28
that PDB failed to comply with the requirements of R.A. No. 6552 on payment of cash surrender value, which
already delves into the merits of PDBs cause of action. In addition, Chandumal even appealed the RTC decision to
the CA, an act which demonstrates her recognition of the trial courts jurisdiction to render said judgment.
Given Chandumals voluntary submission to the jurisdiction of the trial court, the RTC, Las Pias City, Branch 255,
had all authority to render its Decision dated May 31, 2004. The CA, therefore, erred in nullifying said RTC decision
and dispensing with the resolution of the substantial issue raised herein, i.e., validity of the notarial rescission.
Instead, however, of remanding this case to the CA, the Court will resolve the same considering that the records of
29
the case are already before us and in order to avoid any further delay.
There
is
no
valid
rescission
of
the
contract
to
sell
by
notarial
act
pursuant to Section 3(b), R.A. No. 6552
That the RTC had jurisdiction to render the decision does not necessarily mean, however, that its ruling on the
validity of the notarial rescission is in accord with the established facts of the case, the relevant law and
jurisprudence.1wphi1
PDB claims that it has validly rescinded the contract by notarial act as provided under R.A. No. 6552. Basically, PDB
instituted Civil Case No. LP-99-0137 in order to secure judicial confirmation of the rescission and to recover
possession of the property subject of the contract.
30
In Leao v. Court of Appeals, it was held that:
R. A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the
right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the vendor to convey title from acquiring binding force. The law also provides
for the rights of the buyer in case of cancellation. Thus, Sec. 3 (b) of the law provides that:
"If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made and, after five years of installments, an additional
five percent every year but not to exceed ninety percent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation
or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to
31
the buyer." (Citation omitted and emphasis ours)
R.A. No. 6552 recognizes the right of the seller to cancel the contract but any such cancellation must be done in
conformity with the requirements therein prescribed. In addition to the notarial act of rescission, the seller is
required to refund to the buyer the cash surrender value of the payments on the property. The actual cancellation
of the contract can only be deemed to take place upon the expiry of a thirty (30)-day period following the receipt
by the buyer of the notice of cancellation or demand for rescission by a notarial act and the full payment of the
32
cash surrender value.
In this case, it is an admitted fact that PDB failed to give Chandumal the full payment of the cash surrender value.
33
In its complaint, PDB admitted that it tried to deliver the cash surrender value of the subject property as required
under R.A. No. 6552 but Chandumal was "unavailable" for such purpose. Thus, it prayed in its complaint that it be
ordered to "deposit with a banking institution in the Philippines, for the account of Defendants (sic), the amount of
Ten Thousand Pesos (P 10,000.00), Philippine Currency, representing the cash surrender value of the subject
34
property; x x x." The allegation that Chandumal made herself unavailable for payment is not an excuse as the
twin requirements for a valid and effective cancellation under the law, i.e., notice of cancellation or demand for
35
rescission by a notarial act and the full payment of the cash surrender value, is mandatory. Consequently, there
was no valid rescission of the contract to sell by notarial act undertaken by PDB and the RTC should not have given
judicial confirmation over the same.
WHEREFORE, the petition is DENIED. The Decision dated July 27, 2010 of the Court of Appeals, as well as its
Resolution dated February 16, 2011, denying the Motion for Reconsideration in CA-G.R. CV No. 82861
areAFFIRMED in so far as there was no valid service of summons. Further, the Court DECLARES that there was no
valid rescission of contract pursuant to R.A. No. 6552. Accordingly, the Decision dated May 31, 2004 of the

Regional Trial Court, Las Pias City, Branch 255 in Civil Case No. LP-99-0 137 is REVERSED and SET ASIDE, and is
therefore, DISMISSED for lack of merit.
SO ORDERED.
BIENVENIDO
L.
REYES
Associate Justice

G.R. No. L-29155 May 13, 1970

UNIVERSAL
FOOD
CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO,respondents.
Wigberto E. Taada for petitioner.
Teofilo Mendoza for respondents.
CASTRO, J.:
Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February
13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs.
Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE
the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and
defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and
formula subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until
the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against
1
defendant."
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of
Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment."
The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark
and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo
V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay
1
the costs of suit.
On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the
allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had
complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not
entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as
permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the
aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the
corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting
held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw
materials, since the same plaintiff was present when that resolution was adopted and even took part in the
consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the
said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of
the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed
shares of stock with the corporation. The defendant corporation prayed for the dismissal of the complaint, and
asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages
and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February
13, 1969 the appellate court rendered the judgment now the subject of the present recourse.
The Court of Appeals arrived at the following "uncontroverted" findings of fact:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for
the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as

MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and
in the same year plaintiff registered his trademark in his name as owner and inventor with the
Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business,
in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of
negotiations, formed with others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was
appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco
was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of
the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the
secret materials inside the laboratory, never allowed anyone, not even his own son, or the
President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to
keep the formula secret to himself. However, said plaintiff expressed a willingness to give the
formula to defendant provided that the same should be placed or kept inside a safe to be
opened only when he is already incapacitated to perform his duties as Chief Chemist, but
defendant never acquired a safe for that purpose. On July 26, 1960, President and General
Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his
family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied
by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to
said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials,
on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a
Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes
that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of
plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation
should resume its operation. Some five (5) days later, that is, on December 3, 1960, President
and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him
to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day
so as to cope with the orders of the corporation's various distributors and dealers, and with
instructions to take only the necessary daily employees without employing permanent
employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the
same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco,
to recall all daily employees who are connected in the production of Mafran Sauce and also some
additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29,
1960, another memorandum was issued by the President and General Manager instructing
Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce
Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to
hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V.
Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his
services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting
thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look
for a buyer of the corporation including its trademarks, formula and assets at a price of not less
than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff
Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on
February 14, 1961. About a month afterwards, in a letter dated March 20, 1961, defendant, thru
its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the
latter declined the request because the present action was already filed in court (Exhibit J).
1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under
article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded
only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169
of the same Code, in reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him; that in this case the trial court found that
the respondents not only have failed to show that the petitioner has been guilty of default in performing its
contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco

who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the
formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court,
'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said
formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of
Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment.
The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V.
2
Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce.
The Bill of Assignment sets forth the following terms and conditions:
THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the
MAFRAN trade-mark and the formula for MAFRAN SAUCE;
THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit
which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of
its production of MAFRAN SAUCE and other food products and from other business which the
Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its
Board of Directors shall determine and declare, said Party of the First Part hereby assign,
transfer, and convey all its property rights and interest over said Mafran trademark and formula
for MAFRAN SAUCE unto the Party of the Second Part;
THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the
Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as
owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of
the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of
the Second Part and after a competent auditor designated by the Board of Directors shall have
duly examined and audited its books of accounts and shall have certified as to the correctness of
its Financial Statement;
THAT it is hereby understood that the Party of the First Part, to improve the quality of the
products of the Party of the First Part and to increase its production, shall endeavor or undertake
such research, study, experiments and testing, to invent or cause to invent additional formula or
formulas, the property rights and interest thereon shall likewise be assigned, transferred, and
conveyed unto the Party of the Second Part in consideration of the foregoing premises,
covenants and stipulations:
THAT in the operation and management of the Party of the First Part, the Party of the First Part
shall be entitled to the following Participation:
(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief
Chemist of the Party of the Second Part, which appointments are permanent in character and
Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the
Treasurer or any officer who may have the custody of the funds, assets and other properties of
the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be
appointed from the latter; furthermore should the Auditor be appointed from the Party
representing the majority shares of the Party of the Second Part, then the Treasurer shall be
appointed from the Party of the First Part;
(b) THAT in case of death or other disabilities they should become incapacitated to discharge the
duties of their respective position, then, their shares or assigns and who may have necessary
qualifications shall be preferred to succeed them;
(c) That the Party of the First Part shall always be entitled to at least two (2) membership in the
Board of Directors of the Party of the Second Part;
(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the
Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision
over the laboratory assistants and personnel and in the purchase and safekeeping of the
Chemicals and other mixtures used in the preparation of said products;
THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the
PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said
MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second

Part, voluntary or otherwise, eventually arises, in which case then the property rights and
interests over said trademark and formula shall automatically revert the Party of the First Part.
Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent
patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran
sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and
convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the
Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is
absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of
its rights and interest over said MAFRAN trademark and mafran formula."
3
However, a perceptive analysis of the entire instrument and the language employed therein would lead one to
the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This
4
was the precise intention of the parties, as we shall presently show.
Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER
CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of
Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under
a patent, means the compensation paid for the use of a patented invention.
'Royalty,' when used in connection with a license under a patent, means the compensation paid
by the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine
5
Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.)
Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is
provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ...
permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may
have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in
paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the
laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures
used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the
intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran
sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the
6
invention.
Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take
place, "the property rights and interests over said trademark and formula shall automatically revert to the
respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this
case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark
and formula and not merely the right to use it for then such assignment passes the property in such patent
right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become
7
part of the property in the hands of the receiver thereof.
Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue
of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is
admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and
8
cannot be contradicted." The last part of paragraph 3 of the complaint and paragraph 3 of the answer are
reproduced below for ready reference:
3. ... and due to these privileges, the plaintiff in return assigned to said corporation his interest
and rights over the said trademark and formula so that the defendant corporation could use the
formula in the preparation and manufacture of the mafran sauce, and the trade name for the
marketing of said project, as appearing in said contract ....
3. Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.
Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the
respondent patentee.
Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to
9
effect "the least transmission of right," and is there a better example of least transmission of rights than allowing
or permitting only the use, without transfer of ownership, of the formula for Mafran sauce.
10
The foregoing reasons support the conclusion of the Court of Appeals that what was actually ceded and
transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only

the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the
formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been
remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for
Mafran sauce."
2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was
dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of
paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character."
The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the
petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being
dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a
special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to
suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses,
the two private respondents were present, and the respondent patentee was even designated as the acting
superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was
stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates
that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation
was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear import of this
exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the
petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter
had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only
to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was
addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the
records will show that the respondent patentee had knowledge of the resumption of production by the
corporation, but in spite of such knowledge he did not report for work.
The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the
product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have
immediately reported for work, considering that he was then and still is a member of the corporation's board of
directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a
son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist,
while the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of
the resumption of operations.
The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December
29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in
March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner
was set to resume full production, he received a copy of the resolution of its board of directors, directing him to
report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that
Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days
before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist
carried no weight because the president and general manager of the corporation had no power to make the
designation without the consent of the corporation's board of directors. The fact of the matter is that although the
respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly
indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father.
In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the
secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general
manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent
patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure
was taken allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on
December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent
Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a
day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take
only the necessary daily employees without employing permanent ones. Then on December 6, the same president
and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief
chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily

employees for the production of Porky Pops. Twenty-three days afterwards, or on December 29, the same
president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief
Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing,
starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast
production. And finally, at the hearing held on October 24, 1961, the same president and general manager
admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is
the separation pay."
The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint
for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its
corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the
service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The
fact that a month after the institution of the action for rescission, the petitioner corporation, thru its president and
general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the
Court of Appeals correctly observed, such request was a "recall to placate said plaintiff."
3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready
reference the following articles of the new Civil Code governing rescission of contracts:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 of the Mortgage Law.
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.
ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.
At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him. The injured party may choose between fulfillment and rescission of the obligation, with payment of
damages in either case.
In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature.
The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the
services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?
The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such
12
substantial and fundamental breach as would defeat the very object of the parties in making the agreement. The
13
question of whether a breach of a contract is substantial depends upon the attendant circumstances. The
petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383,
rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee
Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial
breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from
the legal principle that the option to demand performance or ask for rescission of a contract belongs to the
14
injured party, the fact remains that the respondents-appellees had no alternative but to file the present action
for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the
other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to
appoint him as its Second Vice-President and Chief Chemist on a permanent basis; that in the manufacture of
Mafran sauce and other food products he would have "absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these
measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation,
enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient

provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the
appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the
obligation of the said respondent patentee to continue research on the patent to improve the quality of the
products of the corporation; the need of absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said
product all these provisions of the Bill of Assignment are so interdependent that violation of one would result in
virtual nullification of the rest.
4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee
is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran
trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with
the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court
awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of
Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of
law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary
from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it
returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is
that the said respondent patentee refused to go back to work, notwithstanding the call for him to return which
negates his right to be paid his back salaries for services which he had not rendered; and that if the said
respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to
March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work.
The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular
provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with
the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the
undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second VicePresident and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities
supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private
respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for
Mafran sauce remained with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the
respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that
of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and
the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these
findings would render it impossible to carry out the order to return the formula to the respondent patentee. The
petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the
obligation to return the things which were the object of the contract. But that as it may, it is a logical inference
from the appellate court's decision that what was meant to be returned to the respondent patentee is not the
formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission
specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right
to use said trademark and formula."
ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is
modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is
hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V.
Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of
Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently
enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The
defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1,
1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from
the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of
P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs
against the petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.
Teehankee J., took no part.

G.R. No. 86150 March 2, 1992

GUZMAN,
BOCALING
vs.
RAOUL S. V. BONNEVIE, respondent.
E. Voltaire Garcia for petitioner.
Guinto Law Office for private respondent.

&

CO., petitioner,

CRUZ, J.:
The subject of the controversy is a parcel of land measuring six hundred (600) square meters, more or less, with
two buildings constructed thereon, belonging to the Intestate Estate of Jose L. Reynoso.
This property was leased to Raoul S. Bonnevie and Christopher Bonnevie by the administratrix, Africa Valdez de
Reynoso, for a period of one year beginning August 8, 1976, at a monthly rental of P4,000.00.
The Contract of lease contained the following stipulation:
20. In case the LESSOR desire or decides to sell the lease property, the LESSEES shall be given a
first priority to purchase the same, all things and considerations being equal.
On November 3, 1976 according to Reynoso, she notified the private respondents by registered mail that she was
selling the leased premises for P600.000.00 less a mortgage loan of P100,000.00, and was giving them 30 days
from receipt of the letter within which to exercise their right of first priority to purchase the subject property. She
said that in the event that they did not exercise the said right, she would expect them to vacate the property not
later then March, 1977.
On January 20, 1977, Reynoso sent another letter to private respondents advising them that in view of their failure
to exercise their right of first priority, she had already sold the property.
Upon receipt of this letter, the private respondents wrote Reynoso informing her that neither of them had
received her letter dated November 3, 1976; that they had advised her agent to inform them officially should she
decide to sell the property so negotiations could be initiated; and that they were "constrained to refuse (her)
request for the termination of the lease.
On March 7, 1977, the leased premises were formally sold to petitioner Guzman, Bocaling & Co. The Contract of
Sale provided for immediate payment of P137,500.00 on the purchase price, the balance of P262,500.00 to be paid
only when the premises were vacated.
On April 12, 1977, Reynoso wrote a letter to the private respondents demanding that they vacate the premises
within 15 days for their failure to pay the rentals for four months. When they refuse, Reynoso filed a complaint for
ejectment against them which was docketed as Civil Case No. 043851-CV in the then City Court of Manila.
On September 25, 1979, the parties submitted a Compromise Agreement, which provided inter alia that "the
defendant Raoul S.V. Bonnevie shall vacate the premises subject of the Lease Contract, Voluntarily and Peacefully
not later than October 31, 1979."
This agreement was approved by the City Court and became the basis of its decision. However, as the private
respondents failed to comply with the above-qouted stipulation, Reynoso filed a motion for execution of the
judgment by compromise, which was granted on November 8, 1979.
On November 12, 1979, private respondent Raoul S. Bonnevie filed a motion to set aside the decision of the City
Court as well as the Compromise Agreement on the sole ground that Reynoso had not delivered to him the
"records of payments and receipts of all rentals by or for the account of defendant ..." The motion was denied and
the case was elevated to the then Court of First Instance. That Court remanded the case to the City Court of Manila
for trial on the merits after both parties had agreed to set aside the Compromise Agreement.
On April 29, 1980, while the ejectment case was pending in the City Court, the private respondents filed an action
for annulment of the sale between Reynoso and herein petitioner Guzman, Bocaling & Co. and cancellation of the
transfer certificate of title in the name of the latter. They also asked that Reynoso be required to sell the property
to them under the same terms ands conditions agreed upon in the Contract of Sale in favor of the petitioner This
complaint was docketed as Civil Case No. 131461 in the then Court of First Instance of Manila.

On May 5, 1980, the City Court decided the ejectment case, disposing as follows:
WHEREFORE, judgment is hereby rendered ordering defendants and all persons holding under
them to vacate the premises at No. 658 Gen. Malvar Street, Malate, Manila, subject of this
action, and deliver possession thereof to the plaintiff, and to pay to the latter; (1) The sum of
P4,000.00 a month from April 1, 1977 to August 8, 1977; (2) The sum of P7,000.00 a month, as
reasonable compensation for the continued unlawful use and occupation of said premises, from
August 9, 1977 and every month thereafter until defendants actually vacate and deliver
possession thereof to the plaintiff; (3) The sum of P1,000.00 as and for attorney's fees; and (4)
The costs of suit.
The decision was appealed to the then Court of First Instance of Manila, docketed as Civil Case No. 132634 and
consolidated with Civil Case No. 131461. In due time, Judge Tomas P. Maddela, Jr., decided the two cases as
follows:
WHEREFORE, premises considered, this Court in Civil Case No. 132634 hereby modifies the
decision of the lower court as follows:
1 Ordering defendants Raoul S.V. Bonnevie and Christopher Bonnevie and all persons holding
under them to vacate the premises at No. 658 Gen. Malvar St., Malate, Manila subject of this
action and deliver possessions thereof to the plaintiff; and
2 To pay the latter the sum of P4,000.00 a month from April 1, 1977 up to September 21, 1980
(when possession of the premises was turned over to the Sheriff) after deducting whatever
payments were made and accepted by Mrs. Africa Valdez Vda. de Reynoso during said period,
without pronouncement as to costs.
As to Civil Case No. 131461, the Court hereby renders judgment in favor of the plaintiff Raoul
Bonnevie as against the defendants Africa Valdez Vda. de Reynoso and Guzman and Bocaling &
Co. declaring the deed of sale with mortgage executed by defendant Africa Valdez Vda. de
Reynoso in favor of defendant Guzman and Bocaling null and void; cancelling the Certificate of
Title No. 125914 issued by the Register of Deeds of Manila in the name of Guzman and Bocaling
& Co.,; the name of Guzman and Bocaling & Co.,; ordering the defendant Africa Valdez Vda. de
Reynoso to execute favor of the plaintiff Raoul Bonnevie a deed of sale with mortgage over the
property leased by him in the amount of P400,000.00 under the same terms and conditions
should there be any other occupants or tenants in the premises; ordering the defendants jointly
and severally to pay the plaintiff Raoul Bonnevie the amount of P50,000.00 as temperate
damages; to pay the plaintiff jointly and severally the of P2,000.00 per month from the time the
property was sold to defendant Guzman and Bocaling by defendant Africa Valdez Vda de
Reynoso on March 7, 1977, up to the execution of a deed of sale of the property by defendant
Africa Valdez Vda. de Reynoso in favor of plaintiff Bonnevie; to pay jointly and severally the
plaintiff Bonnevie the amount of P20,000.00 as exemplary damages, for attorney's fees in the
amount of P10,000.00, and to pay the cost of suit.
Both Reynoso and the petitioner company filed with the Court of Appeals a petition for review of this decision. The
appeal was eventually resolved against them in a decision promulgated on March 16, 1988, where the respondent
1
court substantially affirmed the conclusions of the lower court but reduced the award of damages.
Its motion for reconsideration having been denied on December 14, 1986, the petitioner has come to this Court
asserting inter alia that the respondent court erred in ruling that the grant of first priority to purchase the subject
properties by the judicial administratrix needed no authority from the probate court; holding that the Contract of
Sale was not voidable but rescissible; considering the petitioner as a buyer in bad faith ordering Reynoso to
execute the deed of sale in favor of the Bonnevie; and not passing upon the counterclaim. Reynoso has not
appealed.
The Court has examined the petitioner's contentions and finds them to be untenable.
Reynoso claimed to have sent the November 3, 1976 letter by registered mail, but the registry return card was not
offered in evidence. What she presented instead was a copy of the said letter with a photocopy of only the face of
a registry return card claimed to refer to the said letter. A copy of the other side of the card showing the signature
of the person who received the letter and the data of the receipt was not submitted. There is thus no satisfactory
proof that the letter was received by the Bonnevies.

Even if the letter had indeed been sent to and received by the private respondent and they did not exercise their
right of first priority, Reynoso would still be guilty of violating Paragraph 20 of the Contract of Lease which
specifically stated that the private respondents could exercise the right of first priority, "all things and conditions
being equal." The Court reads this mean that there should be identity of the terms and conditions to be offered to
the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first priority.
The selling price qouted to the Bonnevies was P600,000.00, to be fully paid in cash less only the mortgage lien of
2
P100,000.00. On the other hand, the selling price offered to and accepted by the petitioner was only P400,000.00
and only P137,500.00 was paid in cash while the balance of P272,500.00 was to be paid "when the property (was)
3
cleared of tenants or occupants.
The fact that the Bonnevies had financial problems at that time was no justification for denying them the first
option to buy the subject property. Even if the Bonnevies could not buy it at the price qouted, Reynoso could not
sell it to another for a lower price and under more favorable terms and conditions. Only if the Bonnevies failed to
exercise their right of first priority could Reynoso lawfully sell the subject property to others, and at that onlyunder
the same terms and conditions offered to the Bonnevies.
The Court agrees with the respondent court that it was not necessary to secure the approval by the probate court
of the Contract of Lease because it did not involve an alienation of real property of the estate nor did the term of
the lease exceed one year so as top make it fall under Article 1878(8) of the Civil Code. Only if Paragraph 20 of the
Contract of Lease was activated and the said property was intended to be sold would it be required of the
administratrix to secure the approval of the probate court pursuant to Rule 89 of the Rules of Court.
As a strict legal proposition, no judgment of the probate court was reviewed and eventually annuled collaterally by
the respondent court as contended by the petitioner. The order authorizing the sale in its favor was duly issued by
the probate court, which thereafter approved the Contract of Sale resulting in the eventual issuance if title in favor
of the petitioner. That order was valid insofar as it recognized the existence of all the essential elements of a valid
contract of sale, but without regard to the special provision in the Contract of Lease giving another party the right
of first priority.
Even if the order of the probate court was valid, the private respondents still had a right to rescind the Contract of
Sale because of the failure of Reynoso to comply with her duty to give them the first opportunity to purchase the
subject property.
The petitioner argues that assuming the Contract of Sale to be voidable, only the parties thereto could bring an
action to annul it pursuant to Article 1397 of the Civil Code. It is stressed that private respondents are strangers to
the agreement and therefore have no personality to seek its annulment.
The respondent court correctly held that the Contract of Sale was not voidable rescissible. Under Article 1380 to
1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of
injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had
substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to thirdpersons,
to secure reparation for damages caused to them by a contract, even if this should be valid, by means of the
4
restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury and damage the
5
contract may cause, or to protect some incompatible and preferent right created by the contract. Recission
implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its
6
invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action
for its rescission where it is shown that such third person is in lawful possession of the subject of the contract and
7
that he did not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is
not considered a third party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be
deemed a purchaser in good faith for the record shows that its categorically admitted it was aware of the lease in
favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although
the Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso

and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to and
indeed more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another without notice that some other
person has a right to or interest in such property and pays a full and fair price for the same at the time of such
8
purchase or before he has notice of the claim or interest of some other person in the property. Good faith
9
connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to
determine if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease, Assuming
this to be true, we nevertherless agree with the observation of the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par.
20 on priority right given to the Bonnevies, it had only itself to blame. Having known that the
property it was buying was under lease, it behooved it as a prudent person to have required
Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is contained.
Finally, the petitioner also cannot invoke the Compromise Agreement which it says canceled the right of first
priority granted to the Bonnevies by the Contract of Lease. This agreement was set side by the parties thereto,
resulting in the restoration of the original rights of the private respondents under the Contract of Lease. The Joint
Motion to Remand filed by Reynoso and the private respondents clearly declared inter alia:
That without going into the merits of instant petition, the parties have agreed to SET ASIDE the
compromise agreement, dated September 24, 1979 and remand Civil Case No. 043851 of the City
10
Court of Manila to Branch IX thereof for trial on the merits.
We find, in sum, that the respondent court did not commit the errors imputed to it by the petitioner. On the
contrary, its decision is conformable to the established facts and the applicable law and jurisprudence and so must
be sustained.
WHEREFORE, the petition in DENIED, with costs against the petitioner. The challeged decision is AFFIRMEDin
toto. It is so ordered.
Narvasa, C.J., Grio-Aquino and Medialdea, JJ., concur.

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT,
vs.
MAYFAIR THEATER, INC., respondent.

INC.

&

CARMELO

&

BAUERMANN,

INC., petitioners,

HERMOSISIMA, JR., J.:

1
Before
us
is
a
petition
for
review
of
the
decision of
the
Court
of
2
Appeals involving questions in the resolution of which the respondent appellate court analyzed and
interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the
3
respondent court reversed the trial court which, in dismissing the complaint for specific performance
4
with damages and annulment of contract, found the option clause in the lease contracts entered into by
private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc.
(hereafter, Carmelo) to be impossible of performance and unsupported by a consideration and the
subsequent sale of the subject property to petitioner Equatorial Realty Development, Inc. (hereafter,
5
Equatorial) to have been made without any breach of or prejudice to, the said lease contracts.
We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost
verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon
located at Claro M Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by
the Register of Deeds of Manila.
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a
portion of Carmelo's property particularly described, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M.
Recto Avenue, Manila, with a floor area of 1,610 square meters.
THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at
C.M. Recto Avenue, Manila, with a floor area of 150 square meters.
for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair
thereafter constructed on the leased property a movie house known as "Maxim Theatre."
Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with
Carmelo for the lease of another portion of Carmelo's property, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M.
Recto Avenue, Manila, with a floor area of 1,064 square meters.
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the
two-storey building situated at C.M. Recto Avenue, Manila, with a floor area of
300 square meters and bearing street numbers 1871 and 1875,
for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up
another movie house known as "Miramar Theatre" on this leased property.
Both contracts of lease provides (sic) identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be
given 30-days exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other than
the LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates
itself, to stipulate in the Deed of Sale hereof that the purchaser shall recognize
this lease and be bound by all the terms and conditions thereof.
Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of
Mayfair, through a telephone conversation that Carmelo was desirous of selling the entire Claro
M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the
whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing
to buy the property for Six to Seven Million Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair
replied through a letter stating as follows:
It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's
Mr. Henry Yang through the telephone that your company desires to sell your
above-mentioned C.M. Recto Avenue property.
Under your company's two lease contracts with our client, it is uniformly
provided:
8. That if the LESSOR should desire to sell the leased premises the LESSEE shall
be given 30-days exclusive option to purchase the same. In the event, however,
that the leased premises is sold to someone other than the LESSEE, the LESSOR
is bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to
stipulate in the Deed of Sale thereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions hereof (sic).
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in
acquiring not only the leased premises but "the entire building and other improvements if the
price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of the
second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building,
which included the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial
by virtue of a Deed of Absolute Sale, for the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and annulment
of the sale of the leased premises to Equatorial. In its Answer, Carmelo alleged as special and
affirmative defense (a) that it had informed Mayfair of its desire to sell the entire C.M. Recto
Avenue property and offered the same to Mayfair, but the latter answered that it was interested
only in buying the areas under lease, which was impossible since the property was not a
condominium; and (b) that the option to purchase invoked by Mayfair is null and void for lack of
consideration. Equatorial, in its Answer, pleaded as special and affirmative defense that the
option is void for lack of consideration (sic) and is unenforceable by reason of its impossibility of
performance because the leased premises could not be sold separately from the other portions
of the land and building. It counterclaimed for cancellation of the contracts of lease, and for
increase of rentals in view of alleged supervening extraordinary devaluation of the currency.
Equatorial likewise cross-claimed against co-defendant Carmelo for indemnification in respect of
Mayfair's claims.
During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:
1. That there was a deed of sale of the contested premises by the defendant
Carmelo . . . in favor of defendant Equatorial . . .;
2. That in both contracts of lease there appear (sic) the stipulation granting the
plaintiff exclusive option to purchase the leased premises should the lessor
desire to sell the same (admitted subject to the contention that the stipulation
is null and void);
3. That the two buildings erected on this land are not of the condominium plan;
4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of
the contracts of lease constitute the consideration for the plaintiff's occupancy
of the leased premises, subject of the same contracts of lease, Exhibits A and B;
xxx xxx xxx
6. That there was no consideration specified in the option to buy embodied in
the contract;
7. That Carmelo & Bauermann owned the land and the two buildings erected
thereon;
8. That the leased premises constitute only the portions actually occupied by
the theaters; and
9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty
is the land and the two buildings erected thereon.
xxx xxx xxx
After assessing the evidence, the court a quo rendered the appealed decision, the decretal
portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:
(1) Dismissing the complaint with costs against the plaintiff;
(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by
way of attorney's fees on its counterclaim;
(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month
as reasonable compensation for the use of areas not covered by the contract
(sic) of lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal
interest from July 31, 1978; P70,000 00 per month as reasonable compensation
for the use of the premises covered by the contracts (sic) of lease dated (June
1, 1967 from June 1, 1987 until plaintiff vacates the premises plus legal interest
from June 1, 1987; P55,000.00 per month as reasonable compensation for the
use of the premises covered by the contract of lease dated March 31, 1969
from March 30, 1989 until plaintiff vacates the premises plus legal interest
from March 30, 1989; and P40,000.00 as attorney's fees;
(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo &
Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared
expired and all persons claiming rights under these contracts are directed to
6
vacate the premises.
The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be
an option clause which however cannot be deemed to be binding on Carmelo because of lack of distinct
consideration therefor.
The court a quo ratiocinated:
Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of
lease is not supported by a separate consideration. Without a consideration, the option is
therefore not binding on defendant Carmelo & Bauermann to sell the C.M. Recto property to the
former. The option invoked by the plaintiff appears in the contracts of lease . . . in effect there is
no option, on the ground that there is no consideration. Article 1352 of the Civil Code, provides:
Contracts without cause or with unlawful cause, produce no effect whatever.
The cause is unlawful if it is contrary to law, morals, good custom, public order
or public policy.
Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:
When the offeror has allowed the offeree a certain period to accept, the offer
may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon consideration, as
something paid or promised.
in relation with Article 1479 of the same Code:
A promise to buy and sell a determine thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determine thing for a price
certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price.
The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former
establishes the existence of a distinct consideration. In other words, the promisee has the
burden of proving the consideration. The consideration cannot be presumed as in Article 1354:
Although the cause is not stated in the contract, it is presumed that it exists
and is lawful unless the debtor proves the contrary.
where consideration is legally presumed to exists. Article 1354 applies to contracts in general,
whereas when it comes to an option it is governed particularly and more specifically by Article
1479 whereby the promisee has the burden of proving the existence of consideration distinct
from the price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court said:
(1) Article 1354 applies to contracts in general, whereas the second paragraph
of Article 1479 refers to sales in particular, and, more specifically, to an
accepted unilateral promise to buy or to sell. In other words, Article 1479 is
controlling in the case at bar.
(2) In order that said unilateral promise may be binding upon the promissor,
Article 1479 requires the concurrence of a condition, namely, that the promise
be supported by a consideration distinct from the price.
Accordingly, the promisee cannot compel the promissor to comply with the
promise, unless the former establishes the existence of said distinct
consideration. In other words, the promisee has the burden of proving such
consideration. Plaintiff herein has not even alleged the existence thereof in his
7
complaint.
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto
property to the former.
Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent
Court of Appeals. Respondent appellate court reversed the court a quo and rendered judgment:
1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the
amount of P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering
Equatorial Realty Development, Inc. to accept such payment;
3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to
execute the deeds and documents necessary for the issuance and transfer of ownership to
Mayfair of the lot registered under TCT Nos. 17350, 118612, 60936, and 52571; and
4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged,
declaring the Deed of Absolute Sale between the defendants-appellants Carmelo & Bauermann,
8
Inc. and Equatorial Realty Development, Inc. as valid and binding upon all the parties.
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals
differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the
facts of this case, and concluded that since paragraph 8 of the two lease contracts does not state a fixed
price for the purchase of the leased premises, which is an essential element for a contract of sale to be
perfected, what paragraph 8 is, must be a right of first refusal and not an option contract. It explicated:
Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of
the Civil Code.
Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept
within a certain period. Under this article, the offer may be withdrawn by the offeror before the
expiration of the period and while the offeree has not yet accepted the offer. However, the offer
cannot be withdrawn by the offeror within the period if a consideration has been promised or
given by the offeree in exchange for the privilege of being given that period within which to
accept the offer. The consideration is distinct from the price which is part of the offer. The
contract that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the
Supreme court, citing Bouvier, defined an option as follows: "A contract by virtue of which A, in
consideration of the payment of a certain sum to B, acquires the privilege of buying from or
selling to B, certain securities or properties within a limited time at a specified price," (pp. 686-7).
Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral
promise to buy or to sell a determinate thing for a price within (which) is binding upon the
promisee if the promise is supported by a consideration distinct from the price." That "unilateral
promise to buy or to sell a determinate thing for a price certain" is called an offer. An "offer", in
laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a
legal offer, the proposal must be certain as to the object, the price and other essential terms of
the contract (Art. 1319, Civil Code).
Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days
exclusive option to purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324
and 1479, second paragraph, of the Civil Code. Although the provision is certain as to the object
(the sale of the leased premises) the price for which the object is to be sold is not stated in the
provision Otherwise stated, the questioned stipulation is not by itself, an "option" or the "offer
to sell" because the clause does not specify the price for the subject property.
Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally
categorized as an option, it is, nevertheless, a valid and binding stipulation. What the trial court
failed to appreciate was the intention of the parties behind the questioned proviso.
xxx xxx xxx
The provision in question is not of the pro-forma type customarily found in a contract of lease.
Even appellees have recognized that the stipulation was incorporated in the two Contracts of
Lease at the initiative and behest of Mayfair. Evidently, the stipulation was intended to benefit
and protect Mayfair in its rights as lessee in case Carmelo should decide, during the term of the
lease, to sell the leased property. This intention of the parties is achieved in two ways in
accordance with the stipulation. The first is by giving Mayfair "30-days exclusive option to
purchase" the leased property. The second is, in case Mayfair would opt not to purchase the
leased property, "that the purchaser (the new owner of the leased property) shall recognize the
lease and be bound by all the terms and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving
Mayfair "30-days exclusive option to purchase the (leased premises)," was meant to provide
Mayfair the opportunity to purchase and acquire the leased property in the event that Carmelo
should decide to dispose of the property. In order to realize this intention, the implicit obligation
of Carmelo once it had decided to sell the leased property, was not only to notify Mayfair of such
decision to sell the property, but, more importantly, to make an offer to sell the leased premises
to Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer,
before offering to sell or selling the leased property to third parties. The right vested in Mayfair is
analogous to the right of first refusal, which means that Carmelo should have offered the sale of
the leased premises to Mayfair before offering it to other parties, or, if Carmelo should receive
any offer from third parties to purchase the leased premises, then Carmelo must first give
Mayfair the opportunity to match that offer.
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he
made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:
Q Can you tell this Honorable Court how you made the offer
to Mr. Henry Yang by telephone?
A I have an offer from another party to buy the property and
having the offer we decided to make an offer to Henry Yang
on a first-refusal basis. (TSN November 8, 1983, p. 12.).
and on cross-examination:
Q When you called Mr. Yang on August 1974 can you
remember exactly what you have told him in connection with
that matter, Mr. Pascal?
A More or less, I told him that I received an offer from
another party to buy the property and I was offering him first
choice of the enter property. (TSN, November 29, 1983, p.
18).
We rule, therefore, that the foregoing interpretation best renders effectual the intention of the
9
parties.
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement
of distinct consideration indispensable in an option contract, has no application, respondent appellate
court also addressed the claim of Carmelo and Equatorial that assuming arguendo that the option is valid
and effective, it is impossible of performance because it covered only the leased premises and not the
entire Claro M. Recto property, while Carmelo's offer to sell pertained to the entire property in question.
The Court of Appeals ruled as to this issue in this wise:
We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the
Deed of Absolute Sale between Carmelo and Equatorial covering the whole Claro M. Recto
property, made reference to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the
information submitted by Mayfair in its appellant's Brief (pp. 5 and 46) which has not been
controverted by the appellees, and which We, therefore, take judicial notice of the two theaters
stand on the parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m and TCT No.
118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of land covering
the whole Recto property demonstrates the legal and physical possibility that each parcel of
land, together with the buildings and improvements thereof, could have been sold
independently of the other parcels.
At the time both parties executed the contracts, they were aware of the physical and structural
conditions of the buildings on which the theaters were to be constructed in relation to the
remainder of the whole Recto property. The peculiar language of the stipulation would tend to
limit Mayfair's right under paragraph 8 of the Contract of Lease to the acquisition of the leased
areas only. Indeed, what is being contemplated by the questioned stipulation is a departure from
the customary situation wherein the buildings and improvements are included in and form part
of the sale of the subjacent land. Although this situation is not common, especially considering
the non-condominium nature of the buildings, the sale would be valid and capable of being

performed. A sale limited to the leased premises only, if hypothetically assumed, would have
brought into operation the provisions of co-ownership under which Mayfair would have become
the exclusive owner of the leased premises and at the same time a co-owner with Carmelo of the
10
subjacent land in proportion to Mayfair's interest over the premises sold to it.
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision
of respondent Court of Appeals on the basis of the following assigned errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE
CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE
COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND
UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH
OPTION IN THEIR STIPULATION OF FACTS.
II
WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN
DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR
FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE)
WHEN THE CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.
III
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS
DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT
EVEN PRAYED FOR IN THE COMPLAINT.
IV
THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED
CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA,
TO RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE
11
MERITS OF THE CASE IN THE "DECISION STAGE".
We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case
12
in the Court of Appeals. Suffice it to say that in our Resolution, dated December 9, 1992, we already
took note of this matter and set out the proper applicable procedure to be the following:
On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a
letter-complaint to this Court alleging certain irregularities and infractions committed by certain
lawyers, and Justices of the Court of Appeals and of this Court in connection with case CA-G.R. CV
No. 32918 (now G.R. No. 106063). This partakes of the nature of an administrative complaint for
misconduct against members of the judiciary. While the letter-complaint arose as an incident in
case CA-G.R. CV No. 32918 (now G.R. No. 106063), the disposition thereof should be separate
and independent from Case G.R. No. 106063. However, for purposes of receiving the requisite
pleadings necessary in disposing of the administrative complaint, this Division shall continue to
have control of the case. Upon completion thereof, the same shall be referred to the Court En
13
Banc for proper disposition.
This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and
Equatorial, to be an independent and separate subject for an administrative complaint based on
misconduct by the lawyers and justices implicated therein, it is the correct, prudent and consistent course
of action not to pre-empt the administrative proceedings to be undertaken respecting the said
irregularities. Certainly, a discussion thereupon by us in this case would entail a finding on the merits as to
the real nature of the questioned procedures and the true intentions and motives of the players therein.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated
in the two contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial
court and the Court of Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as
well as Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property to
Equatorial.
Both contracts of lease in question provide the identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days
exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the
LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of
Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and
14
conditions thereof.
We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a
right of first refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a
right of first refusal.
15
As early as 1916, in the case of Beaumont vs. Prieto, unequivocal was our characterization of an option
contract as one necessarily involving the choice granted to another for a distinct and separate
consideration as to whether or not to purchase a determinate thing at a predetermined fixed price.
It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4,
1911, quoted at the beginning of this decision, the defendant Valdes granted to the plaintiff
Borck the right to purchase the Nagtajan Hacienda belonging to Benito Legarda, during the
period of three months and for its assessed valuation, a grant which necessarily implied the offer
or obligation on the part of the defendant Valdes to sell to Borck the said hacienda during the
period and for the price mentioned . . . There was, therefore, a meeting of minds on the part of
the one and the other, with regard to the stipulations made in the said document. But it is not
shown that there was any cause or consideration for that agreement, and this omission is a bar
which precludes our holding that the stipulations contained in Exhibit E is a contract of option,
for, . . . there can be no contract without the requisite, among others, of the cause for the
obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following
language:
A contract by virtue of which A, in consideration of the payment of a certain
sum to B, acquires the privilege of buying from, or selling to B, certain securities
or properties within a limited time at a specified price. (Story vs. Salamon, 71
N.Y., 420.)
From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24
Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:
An agreement in writing to give a person the option to purchase lands within a
given time at a named price is neither a sale nor an agreement to sell. It is
simply a contract by which the owner of property agrees with another person
that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does
sell something; that is, the right or privilege to buy at the election or option of
the other party. The second party gets in praesenti, not lands, nor an
agreement that he shall have lands, but he does get something of value; that is,
the right to call for and receive lands if he elects. The owner parts with his right
to sell his lands, except to the second party, for a limited period. The second
party receives this right, or, rather, from his point of view, he receives the right
to elect to buy.
But the two definitions above cited refer to the contract of option, or, what amounts to the same
thing, to the case where there was cause or consideration for the obligation, the subject of the
agreement made by the parties; while in the case at bar there was no such cause or
16
consideration. (Emphasis ours.)
The rule so early established in this jurisdiction is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must, among other things, indicate the definite price at
which the person granting the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square
17
meter upon failure to make the purchase within the time specified; in one other case we freed the landowner
from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such

18

option was not supported by a distinct consideration; in the same vein in yet one other case, we also invalidated
an instrument entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00 because of lack of
19
consideration; and as an exception to the doctrine enumerated in the two preceding cases, in another case, we
ruled that the option to buy the leased premises for P12,000.00 as stipulated in the lease contract, is not without
consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the consideration for
20
that of the other. In all these cases, the selling price of the object thereof is always predetermined and specified
in the option clause in the contract or in the separate deed of option. We elucidated, thus, in the very recent case
21
of Ang Yu Asuncion vs. Court of Appeals that:
. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the
contract is perfected when a person, called the seller, obligates himself, for a price certain, to
deliver and to transfer ownership of a thing or right to another, called the buyer, over which the
latter agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the
ownership of the thing sold in retained until the fulfillment of a positive suspensive condition
(normally, the full payment of the purchase price), the breach of the condition will prevent the
obligation to convey title from acquiring an obligatory force. . . .
An unconditional mutual promise to buy and sell, as long as the object is made determinate and
the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be
exacted.
An accepted unilateral promise which specifies the thing to be sold and the price to be paid,
when coupled with a valuable consideration distinct and separate from the price, is what may
properly be termed a perfected contract of option. This contract is legally binding, and in sales, it
conforms with the second paragraph of Article 1479 of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promisor if the promise is supported by a
consideration distinct from the price. (1451a).
Observe, however, that the option is not the contract of sale itself. The optionee has the right,
but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted
before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are
then reciprocally bound to comply with their respective undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise
(policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as proposals. These relations, until a
contract is perfected, are not considered binding commitments. Thus, at any time prior to the
perfection of the contract, either negotiating party may stop the negotiation. The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as
by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43
Phil. 270). Where a period is given to the offeree within which to accept the offer, the following
rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free
and has the right to withdraw the offer before its acceptance, or if an acceptance has been
made, before the offeror's coming to know of such fact, by communicating that withdrawal to
the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding
that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous
decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code;
Rural Bank of Paraaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The
right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could
give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person

must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it
would be a breach of that contract to withdraw the offer during the agreed period. The option,
however, is an independent contract by itself; and it is to be distinguished from the projected
main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact,
the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed contract
("object" of the option) since it has failed to reach its own stage of perfection. The optionerofferor, however, renders himself liable for damages for breach of the opinion. . .
In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two
lease contracts involved in the instant case, we so hold that no option to purchase in contemplation of the
second paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease
contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to
Mayfair and is not an option contract. It also correctly reasoned that as such, the requirement of a
separate consideration for the option, has no applicability in the instant case.
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which
would bring them into the ambit of the usual offer or option requiring an independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price.
It is a separate and distinct contract from that which the parties may enter into upon the consummation
22
of the option. It must be supported by consideration. In the instant case, the right of first refusal is an
integral part of the contracts of lease. The consideration is built into the reciprocal obligations of the
parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by
Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render in
effectual or "inutile" the provisions on right of first refusal so commonly inserted in leases of real estate
nowadays. The Court of Appeals is correct in stating that Paragraph 8 was incorporated into the contracts
of lease for the benefit of Mayfair which wanted to be assured that it shall be given the first crack or the
first option to buy the property at the price which Carmelo is willing to accept. It is not also correct to say
that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of
the entire contract of lease. The consideration for the lease includes the consideration for the right of first
refusal. Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price agreed
upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be
given the right to match the offered purchase price and to buy the property at that price. As stated
23
in Vda. De Quirino vs. Palarca, in reciprocal contract, the obligation or promise of each party is the
consideration for that of the other.
The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8
to be that of a contractual grant of the right of first refusal to Mayfair.
We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and
Equatorial.
The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu
24
Asuncion vs. Court of Appeals.
First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have
the right of first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did
recognize this right of Mayfair, for it informed the latter of its intention to sell the said property in 1974.
There was an exchange of letters evidencing the offer and counter-offers made by both parties. Carmelo,
however, did not pursue the exercise to its logical end. While it initially recognized Mayfair's right of first
refusal, Carmelo violated such right when without affording its negotiations with Mayfair the full process
to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the "30day exclusive option" time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some
time, and then sold, without prior notice to Mayfair, the entire Claro M Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial
was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As
such, Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.
. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil
Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury
to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies
for they had substantial interests that were prejudiced by the sale of the subject property to the
petitioner without recognizing their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even
to third persons, to secure reparation for damages caused to them by a contract, even if this
should be valid, by means of the restoration of things to their condition at the moment prior to
the celebration of said contract. It is a relief allowed for the protection of one of the contracting
parties and even third persons from all injury and damage the contract may cause, or to protect
some incompatible and preferent right created by the contract. Rescission implies a contract
which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is an
obstacle to the action for its rescission where it is shown that such third person is in lawful
possession of the subject of the contract and that he did not act in bad faith. However, this rule is
not applicable in the case before us because the petitioner is not considered a third party in
relation to the Contract of Sale nor may its possession of the subject property be regarded as
acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the
petitioner cannot be deemed a purchaser in good faith for the record shows that it categorically
admitted it was aware of the lease in favor of the Bonnevies, who were actually occupying the
subject property at the time it was sold to it. Although the Contract of Lease was not annotated
on the transfer certificate of title in the name of the late Jose Reynoso and Africa Reynoso, the
petitioner cannot deny actual knowledge of such lease which was equivalent to and indeed more
binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another without notice
that some other person has a right to or interest in such property and pays a full and fair price for
the same at the time of such purchase or before he has notice of the claim or interest of some
other person in the property. Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another. Tested by these principles, the petitioner cannot tenably
claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies
and such knowledge should have cautioned it to look deeper into the agreement to determine if
it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the Contract of
Lease. Assuming this to be true, we nevertheless agree with the observation of the respondent
court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease Contract,
which includes Par. 20 on priority right given to the Bonnevies, it had only itself
to blame. Having known that the property it was buying was under lease, it
behooved it as a prudent person to have required Reynoso or the broker to
25
show to it the Contract of Lease in which Par. 20 is contained.
Petitioners assert the alleged impossibility of performance because the entire property is indivisible
property. It was petitioner Carmelo which fixed the limits of the property it was leasing out. Common
sense and fairness dictate that instead of nullifying the agreement on that basis, the stipulation should be
given effect by including the indivisible appurtenances in the sale of the dominant portion under the right
of first refusal. A valid and legal contract where the ascendant or the more important of the two parties is
the landowner should be given effect, if possible, instead of being nullified on a selfish pretext posited by
the owner. Following the arguments of petitioners and the participation of the owner in the attempt to

strip Mayfair of its rights, the right of first refusal should include not only the property specified in the
contracts of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to
be indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing
Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing
the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving
Mayfair full opportunity to negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be
authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible
property. The boundaries of the property sold should be the boundaries of the offer under the right of first
refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the
concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion
vs.Court of Appeals should be modified, if not amplified under the peculiar facts of this case.
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad
faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In
fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the
contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have
cautioned it to look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.
Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside
or rescinded. All of these matters are now before us and so there should be no piecemeal determination
of this case and leave festering sores to deteriorate into endless litigation. The facts of the case and
considerations of justice and equity require that we order rescission here and now. Rescission is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause or to protect some incompatible and preferred right by the
26
contract. The sale of the subject real property by Carmelo to Equatorial should now be rescinded
considering that Mayfair, which had substantial interest over the subject property, was prejudiced by the
sale of the subject property to Equatorial without Carmelo conferring to Mayfair every opportunity to
27
negotiate within the 30-day stipulated period.
This Court has always been against multiplicity of suits where all remedies according to the facts and the
law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which
Mayfair could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no
dispute over it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities.
The fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was
entitled to accept or reject which is P11,300,000.00. This is clear from the records.
To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the
latter of the disputed property would be unjust and unkind to Mayfair because it is once more compelled
to litigate to enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the
viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the
river. Why should Carmelo be rewarded for and allowed to profit from, its wrongdoing? Prices of real
estate have skyrocketed. After having sold the property for P11,300,000.00, why should it be given
another chance to sell it at an increased price?
Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to
execute because a contract over the right of first refusal belongs to a class of preparatory juridical
relations governed not by the law on contracts but by the codal provisions on human relations. This may
apply here if the contract is limited to the buying and selling of the real property. However, the obligation
of Carmelo to first offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of
first refusal which created the obligation. It should be enforced according to the law on contracts instead
of the panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of
suits. There is something to execute and that is for Carmelo to comply with its obligation to the property
under the right of the first refusal according to the terms at which they should have been offered then to
Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This
juridical relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be
executed according to their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in
mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a
contract entered into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold
any notice or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a
calculated and contrived plan of non-compliance with the agreement of first refusal.
On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice
and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and
Equatorial took unconscientious advantage of Mayfair.
Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the
grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair
price for the property. It has used the P11,300,000.00 all these years earning income or interest from the
amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the
property turned over to it by Carmelo. In fact, during all the years that this controversy was being
litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property.
Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or
Equatorial.
WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CAG.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The
latter is directed to execute the deeds and documents necessary to return ownership to Carmelo and
Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy
the aforesaid lots for P11,300,000.00.
SO ORDERED.
Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ., concur.
Narvasa, C.J., took no part.

G.R. No. L-28602 September 29, 1970

UNIVERSITY
OF
THE
PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY, et
al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V.
Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to
be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or
UP) against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or
ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber

concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second
order, dated 14 January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to
refrain from exercising logging rights or conducting logging operations on the concession; and the third order,
dated 12 December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the
three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP,
an institution of higher learning, to be operated and developed for the purpose of raising additional income for its
support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was
granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible
for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant,
in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom
but, as of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated demands,
it had failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement,
ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated
9 December 1964, which was approved by the president of UP, and which stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance
outstanding after the said payments have been applied shall be paid by the DEBTOR in full no
later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this
document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and
the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the
necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty
Thousand Pesos (P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December
1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously
acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as
rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September
1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First
Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and
alleging the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order,
dated 30 September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from
continuing its logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was conducted,

and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16
February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary
injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding;
on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent
judge issued the first of the questioned orders, enjoining UP from awarding logging rights over the concession to
any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber
Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967,
declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to
refrain from exercising logging rights or conducting logging operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act
3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the
petition. In its answer, respondent corrected itself by stating that the period of the logging agreement is five (5)
years - not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435.
It reiterated, however, its defenses in the court below, which maybe boiled down to: blaming its former general
manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the sum of
P219,382.94; that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could not be sold to
Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was
referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral
rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow
respondent to cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that
respondent was permitted to cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging
operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging
operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may
disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the
lower court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order
expresses no specific findings in this regard), that it is only after a final court decree declaring the contract
rescinded for violation of its terms that U.P. could disregard ALUMCO's rights under the contract and treat the
agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner
of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to
consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit."
As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated inFroilan vs.
Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276:

there is nothing in the law that prohibits the parties from entering into agreement that violation
of the terms of the contract would cause cancellation thereof, even without court intervention.
In other words, it is not always necessary for the injured party to resort to court for rescission of
the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages;
in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself injured must first file suit and
wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to
minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent
1
declaring that judicial action is necessary for the resolution of a reciprocal obligation, since in every case where
the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively
settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without
it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon
should become barred by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may
render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed.
Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred
from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the
defaulter the initiative of instituting suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting party, the
Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of
our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or
synallagmatic contracts may be made extrajudicially unless successfully impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para
el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun
jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su
deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of
10 April 1929; 106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad"
atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do
opcion entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en
la via judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que si la
declaracion de resolucion hecha por una de las partes se impugna por la otra, queda aquella
sometida el examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha

la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956;

Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las
partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de
voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y
2. 0 Por la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion
de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o
conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo
que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado
por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre
otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el
cual fragenti fidem, fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis
supplied).
In the light of the foregoing principles, and considering that the complaint of petitioner University made out
aprima facie case of breach of contract and defaults in payment by respondent ALUMCO, to the extent that the
court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied
its motions to lift the injunction; that it is not denied that the respondent company had profited from its
operations previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of
Payment"); that the excuses offered in the second amended answer, such as the misconduct of its former manager
Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said respondent was in a
better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by respondent
ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in
enjoining petitioner's measures to protect its interest without first receiving evidence on the issues tendered by
the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion, correctible
by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of
Appeals, and the case is pending therein, this Court abstains from making any pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February
1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be
remanded for further proceedings conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.
Reyes, J.B.L., Actg. C.J., is on leave.

G.R. No. 73893 June 30, 1987

MARGARITA
SURIA
AND
GRACIA
R.
JOVEN, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. JOSE MAR GARCIA (Presiding Judge of the RTC of Laguna, Branch
XXIV, Bian, Laguna), and SPOUSES HERMINIO A. CRISPIN and NATIVIDAD C. CRISPIN, respondents.

De Castro & Cagampang Law Offices for petitioners.

Nelson A. Loyola for private respondents.
RESOLUTION

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the decision of the Court of Appeals dismissing for lack of merit the
petition for certiorari filed therein.
As factual background, we quote from the Court of Appeals' decision:
The factual and procedural antecedents of this case may be briefly stated as follows:
On June 20, 1983, private-respondents filed a complaint before the Regional Trial Court of
Laguna, Branch XXIV, for rescission of contract and damages, alleging among others:
1. x x x
2. That on March 31, 1975, plaintiffs being the owners of a parcel of land situated at Barrio San
Antonio, San Pedro, Laguna, entered into a contract denominated as DEED OF SALE WITH
MORTGAGE, with herein defendants, a true copy of said contract (which is made an integral part
hereof) is hereto attached as ANNEX ."A":
3. x x x
4. That the defendants violated the terms and conditions of the contract by failing to pay the
stipulated installments and in fact only one installment due in July 1975 (paid very late in the
month of September, 1975) was made all the others remaining unsettled to the present time;
5. That repeated verbal and written demands were made by plaintiff upon the defendants for the
payment of the installments, some of said written demands having been made on September 24,
1981, February 7, 1982, February 24, 1983, March 13, 1983, and April 12, 1983, but defendants
for no justifiable reason failed to comply with the demands of plaintiffs;
6. x x x
On November 14, 1983, petitioners filed their answer with counterclaim.
On July 16, 1984, petitioners filed a motion to disniiss complaint, alleging that:
1. That plaintiffs are not entitled to the subsidiary remedy of rescission because of the presence
of remedy of foreclosure in the Deed of Sale with Mortgage (Annex "A", Complaint);
2. That, assuming arguendo that rescission were a proper remedy, it is apparent in the face of
the Complaint that the plaintiffs failed to comply with the requirements of law, hence the
rescission was ineffective, illegal, null and void, and invalid.

On July 26, 1984, private-respondents filed their opposition to the above motion.
In the meantime, on August 6, 1984, petitioners formerly offered to pay private-respondents all
the outstanding balance under the Deed of Sale with Mortgage, which offer was rejected by
private respondents on August 7, 1984.
On November 26, 1984, the respondent-Court denied the motion to dismiss. The order reads:
Defendants through counsel filed a Second Motion to Dismiss dated July 24, 1984 based on an
affirmative defense raised in their answer, that is, that the complaint fails to state a cause of
action for rescission against defendants because (1) plaintiffs are not entitled to the subsidiary
remedy of rescission because of the presence of the remedy of foreclosure in the Deed of Sale
with Mortgage (Annex "A", Complaint) and (2) assuming arguendo that rescission were a
proper remedy, it is apparent from the face of the Complaint that the plaintiffs failed to comply
with the requirements of law, hence the rescission was ineffective, illegal, null and void, and
invalid.
After a careful perusal of the allegations of the complaint considered in the light of existing
applicable law and jurisprudence touching on the matters in issue, and mindful of the settled rule
that in a motion to dismiss grounded on lack of cause of action the allegations of the complaint
must be assumed to be true, the Court finds and holds that the motion to dismiss dated July 24,
1984 filed by defendants lacks merit and therefore denied the same.
SO ORDERED.
On January 31, 1985, petitioners filed a motion for reconsideration to which private-respondents
filed their opposition on February 11, 1985. On February 19, 1985, petitioners filed their reply.
On March 13, 1985, the respondent-Court denied the motion for reconsideration. The order
reads in part:
xxx xxx xxx
Perusing the grounds invoked by the defendants in their Motion for Reconsideration and Reply
as well as the objections raised by plaintiffs in their opposition, and it appearing that in its Order
dated November 26, 1984, the Court has sufficiently, althou (sic) succinctly stated its reason for
denying the motion to dismiss dated July 16, 1984, that is, for lack of merit, the Court finds no
overriding reason or justification from the grounds invoked in the said Motion for
Reconsideration for it to reconsider, change, modify, or set aside its Order dated November 26,
1984. The Court still believes that the two (2) grounds invoked by defendants in their Motion to
Dismiss dated July 16, 1984 are not meritorious when considered in the light of prevailing law
and jurisprudence and the hypothetically admitted allegations of the complaint, and for that
reason it denied the motion to dismiss in its said order of November 26, 1984.
The instant Motion for Reconsideration is therefore denied for lack of merit. (Pp, 29-32, Rollo)
The questions raised by petitioner are as follows:
I

IN A DEED OF SALE, WHICH IS COUPLED WITH A MORTGAGE TO SECURE PAYMENT OF THE

BALANCE OF THE PURCHASE PRICE, MAY THE SELLER RESORT TO THE REMEDY OF RESCISSION
UNDER ARTICLE 1191 OF THE CIVIL CODE WHICH PROVIDES FOR THE SUBSIDIARY AND
EQUITABLE REMEDY OF RESCISSION IN CASE OF BREACH OF RECIPROCAL OBLIGATIONS?
Otherwise stated,
IS THE SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION AVAILABLE IN THE PRESENCE OF A
REMEDY OF FORECLOSURE IN THE LIGHT OF THE EXPRESS PROVISION OF ARTICLE 1383 OF THE
CIVIL CODE THAT: 'THE ACTION FOR RESCISSION IS SUBSIDIARY; IT CANNOT BE INSTITUTED
EXCEPT WHEN THE PARTY SUFFERING DAMAGE HAS NO OTHER LEGAL MEANS TO OBTAIN
REPARATION FOR THE SAME?
xxx xxx xxx
II
MAY THE SELLER LEGALLY DEMAND RESCISSION OF THE DEED OF SALE WITH MORTGAGE
WITHOUT OFFERING TO RESTORE TO THE BUYER WHAT HE HAS PAID, AS REQUIRED BY ARTICLE
1385, OR COMPLYING WITH THE REQUIREMENTS OF THE MACEDA LAW (REPUBLIC ACT 6552)
GRANTING THE BUYER A GRACE PERIOD TO PAY WITHOUT INTEREST, AND, IN CASE OF
CANCELLATION IN CASE THE BUYER STILL COULD NOT PAY WITHIN THE GRACE PERIOD,
REQUIRING THE SELLER TO ORDER PAYMENT OF THE CASH SURRENDER VALUE BEFORE THE
CANCELLATION MAY LEGALLY TAKE EFFECT (SEC. 3[b], LAST PAR., REP. ACT 6552)?
The petition was denied in a minute resolution on June 13, 1986 but was given due course on September 29, 1986
on a motion for reconsideration.
The petition is impressed with merit.
The respondent court rejected the petitioners' reliance on paragraph (H) of the contract which grants to the
vendors mortgagees the right to foreclose "in the event of the failure of the vendees-mortgagors to comply with
any provisions of this mortgage." According to the appellate court, this stipulation merely recognizes the right of
the vendors to foreclose and realize on the mortgage but does not preclude them from availing of other remedies
under the law, such as rescission of contract and damages under Articles 1191 and 1170 of the Civil Code in
relation to Republic Act No. 6552.
The appellate court committed reversible error. As will be explained later, Art. 1191 on reciprocal obligations is not
applicable under the facts of this case. Moreover, Art. 1383 of the Civil Code provides:
The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.
The concurring opinion of Justice J.B.L. Reyes in Universal Food Corp. v. Court of Appeals (33 SCRA 22) was cited by
the appellate court.
In that case, Justice J.B.L. Reyes explained:
xxx xxx xxx

... The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is subordinated to
anything other than the culpable breach of his obligations by the defendant. This rescission is a
principal action retaliatory in character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti
fidem, non est fides servanda," Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action
is subordinated to the existence of that prejudice, because it is the raison d 'etre as well as the
measure of the right to rescind. Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384.
But the operation of these two articles is limited to the cases of rescission for lesion enumerated
in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article
1191.
It is probable that the petitioner's confusion arose from the defective technique of the new Code
that terms both instances as "rescission" without distinctions between them; unlike the previous
Spanish Civil Code of 1889, that differentiated "resolution" for breach of stipulations from
"rescission" by reason of lesion or damage. But the terminological vagueness does not justify
confusing one case with the other, considering the patent difference in causes and results of
either action.
According to the private respondents, the applicable law is Article 1191 of the Civil Code which provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfiument, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
There is no dispute that the parties entered into a contract of sale as distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a determinate
thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent (Art. 1458, Civil Code).
From the respondents' own arguments, we note that they have fully complied with their part of the reciprocal
obligation. As a matter of fact, they have already parted with the title as evidenced by the transfer certificate of
title in the petitioners' name as of June 27, 1975.
The buyer, in tum, fulfilled his end of the bargain when he executed the deed of mortgage. The payments on an
installment basis secured by the execution of a mortgage took the place of a cash payment. In other words, the
relationship between the parties is no longer one of buyer and seller because the contract of sale has been

perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the
petitioners'promise to pay on installment basis the sum they owe the respondents, the latter have accepted the
mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L. Reyes.
The petitioners' breach of obligations is not with respect to the perfected contract of sale but in the obligations
created by the mortgage contract. The remedy of rescission is not a principal action retaliatory in character but
becomes a subsidiary one which by law is available only in the absence of any other legal remedy. (Art. 1384, Civil
Code).
Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision found in the
contract between the parties.
The petitioners are correct in citing this Court's ruling in Villaruel v. Tan King (43 Phil. 251) where we Stated:
At the outset it must be said that since the subject-matter of the sale in question is real property,
it does not come strictly within the provisions of article 1124 of the Civil Code, but is rather
subjected to the stipulations agreed upon by the contracting parties and to the provisions of
Article 1504 of the Civil Code.
The "pacto comisorio" of "ley comisoria" is nothing more than a condition subsequent of the
contract of purchase and sale. Considered carefully, it is the very condition subsequent that is
always attached to all bilateral obligations according to article 1124; except that when applied to
real property it is not within the scope of said article 1124, and it is subordinate to the
stipulations made by the contracting parties and to the provisions of the article on which we are
now commenting" (article 1504). (Manresa, Civil Code, volume 10, page 286, second edition.)
Now, in the contract of purchase and sale before us, the parties stipulated that the payment of
the balance of one thousand pesos (P1,000) was guaranteed by the mortgage of the house that
was sold. This agreement has the two-fold effect of acknowledging indisputably that the sale had
been consummated, so much so that the vendee was disposing of it by mortgaging it to the
vendor, and of waiving the pacto comisorio, that is, the resolution of the sale in the event of
failure to pay the one thousand pesos (P1,000) such waiver being proved by the execution of the
mortgage to guarantee the payment, and in accord therewith the vendor's adequate remedy, in
case of nonpayment, is the foreclosure of such mortgage. (at pp. 255-256).
xxx xxx xxx
There is, therefore, no cause for the resolution of the sale as prayed for by the plaintiff. His
action, at all events, should have been one for the foreclosure of the mortgage, which is not the
action brought in this case.
Article 1124 of the Civil Code, as we have seen, is not applicable to this case. Neither is the
doctrine enunciated in the case of Ocejo, Perez & Co. v. International Banking Corporation (37
Phil. 631), which plaintiff alleges to be applicable, because that principle has reference to the sale
of personal property. (at p. 257)
The petitioners have offered to pay au past due accounts. Considering the lower purchasing value of the peso in
terms of prices of real estate today, the respondents are correct in stating they have suffered losses. However,
they are also to blame for trusting persons who could not or would not comply with their obligations in time. They

could have foreclosed on the mortgage immediately when it fell due instead of waiting all these years while trying
to enforce the wrong remedy.
WHEREFORE, the petition is hereby GRANTED. The Intermediate Appellate Court's decision dated November 8,
1985 and the resolution dated December 6, 1985 and February 28, 1986 are REVERSED and SET ASIDE. The
petitioners are ordered to pay the balance of their indebtedness under the Deed of Absolute Sale with Mortgage
with legal interests from the second installment due on October 24, 1975 until fully paid, failing which the
respondents may resort to foreclosure.
SO ORDERED.
Fernan (Chairman), Paras, Padilla, Bidin and Cortes, JJ., concur.

CENTRAL BANK OF THE PHILIPPINES, petitioner, vs. SPOUSES ALFONSO and ANACLETA BICHARA, respondents.
DECISION
DE LEON, JR., J.:
[1]

[2]

Before us is a petition for review on certiorari praying for the reversal of the Decision and Resolution dated
[3]
February 28, 1997 and October 17, 1997, respectively, rendered by the Former Special Fourteenth Division of the
Court of Appeals in CA-G.R. CV No. 44448. The appellate court reversed the judgment of the trial court and
decreed the contract of sale entered into by the opposing parties as rescinded. Supremax
The facts are:
Respondents SPOUSES ALFONSO and ANACLETA BICHARA were the former registered owners of Lots 621-C-1 and
[4]
[5]
621-C-2 situated in Legazpi City and covered by Transfer Certificates of Title Nos. 18138 and 18139. The two
properties have an aggregate area of 811 square meters. On July 19, 1983, the respondents sold the two
properties to petitioner CENTRAL BANK OF THE PHILIPPINES for the sum of P405,500. 00, or at P500.00 per square
[6]
meter. The deed of sale contained the following pertinent stipulations:
xxx......xxx......xxx......xxx
2. The VENDEE by virtue of the sale of real property agreed upon shall pay to the VENDORS at the
rate of FIVE HUNDRED PESOS (P500.00) per square meter or at a total price of FOUR HUNDRED
FIVE THOUSAND FIVE HUNDRED PESOS (P405,500.00), such payment to be effected only after
this Deed of Sale shall have been duly registered and a clean title issued in the name of VENDEE.
It is agreed that all fees and expenses, cost of documentary and science stamps necessary for the
registration of the property with the Registry of Deeds and the transfer of title of the parcels of
the land herein sold to the VENDEE as well as the transfer tax due under this transaction shall be
borne by the VENDORS;
xxx......xxx......xxx......xxx

4. The VENDORS hereby likewise undertake at their expense to fill the parcels of land with an
escombro free from waste materials compacted to the street level upon signing of the Deed of
Sale to suit the ground for the construction of the regional office of the Central Bank of the
Philippines thereat.
Petitioner caused the two properties to be consolidated, with several other parcels of land, into a single estate
having a total area of 6,700 square meters. Lots 621-C-1 and 621-C-2, shaped roughly like a right triangle,
[7]
represent twelve per cent of the total area and, more importantly, provide access to Calle Rizal. Juris
The record discloses that despite respondents' failure to pay the capital gains tax and other transfer fees, Transfer
[8]
Certificate of Title No. 25267 was nonetheless issued in petitioner's name on September 6, 1983. Two
annotations were recorded in the memorandum of encumbrances. The first was a notice of adverse claim in favor
of the heirs of Lutgarda Arcos Rempillo filed under Entry No. 58127 dated December 27, 1983. The second was a
notice of lis pendens in favor of one Jaime Rempillo, in connection with Civil Case No. 7253 pending before the
Court of First Instance of Albay filed under Entry No. 58336 dated January 24, 1984. Both were subsequently
cancelled pursuant to a decision in Civil Case No. 7253, per Entry No. 60214 dated September 12, 1984.
Despite the issuance of the title, petitioner failed to pay respondent. On its part, respondents did not fill up the lot
with escombro despite several demands made by petitioner. Petitioner was thus constrained to undertake the
filling up of the said lots, by contracting the services of BGV Construction. The filling up of the lots cost petitioner
[9]
[10]
P45,000.00. Petitioner deducted the said amount from the purchase price payable to respondents.
Petitioner, however, still did not pay the respondents. Consequently, on September 7, 1992, respondents
commenced Civil Case No. 8645, an action for rescission or specific performance with damages, against petitioner
before the Regional Trial Court, Fifth Judicial Region, Branch 7, of Legazpi City. Respondents alleged that petitioner
failed to pay the purchase price despite demand. They prayed for the rescission of the contract of sale and the
return of the properties, or in the alternative that petitioner be compelled to pay the purchase price plus interest
at the rate of 12 % per annum from July 19, 1983, until fully paid, and to pay the capital gains and documentary
stamp taxes with the Bureau of Internal Revenue and registration fees with the Register of Deeds.Scjuris
[11]

[12]

Petitioner tendered payment to respondents by Central Bank check no. 483008 in the amount of
P360,500.00. Respondents refused the tender, however, in view of their complaint for rescission. After receipt of
[13]
summons, petitioner filed its answer averring that it was justified in delaying payment of the purchase price in
view of respondents' breach of several conditions in the contract. First, petitioner alleged that respondents failed
to deliver to the former free and legal possession of the two properties, in view of the encumbrances noted in the
title, in addition to the presence of squatters who were not evicted by respondents. Second, it claimed that
respondents did not fill up the lots with escombro free from waste materials, as agreed upon. Petitioner
counterclaimed for damages of P8,000,000.00 representing payments for rentals for the lease of premises it used
as a temporary regional office; P100,000.00 as exemplary damages; P50,000.00 as attorney's fees; and costs.
[14]

On January 22, 1993, petitioner filed a motion for consignation before the trial court. The motion was granted
[15]
per an Order dated January 26, 1993. After trial, the trial court issued its Decision dated October 26,
[16]
1993,
the dispositive portion of which states:
WHEREFORE, in view of the foregoing, decision is hereby rendered as follows:
1. The plaintiffs are ordered to accept the deposited amount of P360,500.00 in February 1993 at
the Office of the RTC Clerk of Court as full payment for the properties in question, considering
that the sum of P45,000.00 expended by defendant in undertaking the filling up of the properties
is credited to the original purchase price of P405,500.00;

2. The defendant is ordered to pay the plaintiffs legal interest at the rate of six (6) per cent per
annum on the original purchase price of P405,000.00 from September 6, 1983 up to July 13,
1992, when the P45,000.00 was credited to the original purchase price (Exhibit 12-c);
3. The defendant is ordered to pay the plaintiffs legal interest at the rate of six (6) per cent per
annum on the remaining amount of P360,500.00 from July 14, 1992 up to February 1993, when
said amount was deposited at the Office of the RTC Clerk of Court;
4. And other forms of damages sustained by either plaintiffs or defendant are to be borne or
shouldered by the respective party.
With costs against defendant. Jurissc
Both parties appealed the decision to the Court of Appeals. Initially, petitioner's appeal was dismissed for failure to
[17]
file the docket fees, per a Resolution dated August 22, 1994. The dismissal was recalled subsequently upon
[18]
petitioner's filing of a Manifestation informing the appellate court that it had withdrawn its appeal at the trial
[19]
court level. Said manifestation was duly noted.
[20]

On February 28, 1997, the appellate court rendered judgment reversing the decision of the trial court. Instead, it
ordered the rescission of the contract of sale and the reconveyance of the properties to respondents. The
appellate court likewise ordered respondents to reimburse petitioner the cost of filling up the lot with escombro,
and petitioner to pay respondents attorney's fees and costs. The motion for reconsideration filed by petitioner was
[21]
denied in the assailed Resolution of October 17, 1997.
Aggrieved by the ruling, petitioner elevated the matter to us via the instant petition, contending that:
I
THE COURT OF APPEALS FAILED TO RULE THAT PRIVATE RESPONDENTS DID NOT COMPLY WITH
THEIR OBLIGATIONS TO CBP IN GOOD FAITH THUS PRIVATE RESPONDENTS ARE NOT ENTITLED AS
A MATTER OF RIGHT TO RESCISSION.
II
THE COURT OF APPEALS FAILED TO RULE THAT CBP WAS JUSTIFIED IN WITHHOLDING PAYMENT
OF THE PURCHASE PRICE OF THE SUBJECT LOT SOLD TO THEM BY PRIVATE RESPONDENTS.
III
THE COURT OF APPEALS FAILED TO RULE THAT THE TRIAL COURT DID NOT COMMIT A
[22]
REVERSIBLE ERROR WHEN IT ORDERED SPECIFIC PERFORMANCE INSTEAD OF RESCISSION.
The right to rescind a contract involving reciprocal obligations is provided for in Article 1191 of the Civil Code,
which states: Misjuris
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has choosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The law speaks of the right of the "injured party" to choose between rescission or fulfillment of the obligation,
with the payment of damages in either case. Here, respondents claim to be the injured party and consequently
seek the rescission of the deed of sale, or in the alternative, its fulfillment but on terms different from those
previously agreed upon. Respondents aver that they are entitled to cancel the obligation altogether in view of
petitioner's failure to pay the purchase price when the same became due. Petitioner disputes respondent's stand,
claiming that if anyone was at fault, it was the latter who dismally failed to comply with their contractual
obligations. Hence, it was entitled to withhold payment of the purchase price.
An instance where the law clearly allows the vendee to withhold payment of the purchase price is Article 1590 of
the Civil Code, which provides:
Should the vendee be disturbed in the possession or ownership of the thing acquired, or should
he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of
mortgage, he may suspend the payment of the price until the vendor has caused the disturbance
or danger to cease, unless the latter gives security for the return of the price in a proper case, or
it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to
make the payment. A mere act of trespass shall not authorize the suspension of the payment of
the price. Jjlex
This is not, however, the only justified cause for retention or withholding the payment of the agreed price. A noted
authority on civil law states that the vendee is nonetheless entitled if the vendor fails to perform
any essential obligation of the contract. Such right is premised not on the aforequoted article, but on general
[23]
principles of reciprocal obligations.
[24]

This view is consistent with our rulings in earlier cases that resolution is allowed only for substantial breaches
[25]
and not for those which are slight or casual. Consider our pronouncement inBorromeo v. Franco:
The contract in question contains various clauses and stipulations but the defendants refused to
fulfill their promise to sell on the ground that the vendee had not perfected the title papers to
the property in question within the six months agreed upon in clause (c). That stipulation was not
an essential part of the contract and a failure to comply therewith is no obstacle to the
fulfillment of the promise to sell.
xxx......xxx......xxx......xxx
The obligations which the purchaser, Borromeo, imposed upon himself, to perfect the papers to
the property within a period of six months, is not correlative with the obligation to sell the
property. These obligations do not arise from the same cause. They create no reciprocal rights
between the contracting parties, so that a failure to comply with the stipulation contained in
clause (c) on the part of the plaintiff purchaser within the period of six months provided for in
the said contract, as he, the plaintiff himself admits, does not give the defendants the right to

cancel the obligation which they imposed upon themselves to sell the two houses in question in
accordance with the provisions of article 1124 of the Civil Code, since no real juridical bilaterality
or reciprocity existed between the two obligations, because the obligation to perfect the title
papers to the houses in question is not correlative with the obligation to fulfill the promise to sell
such property. One obligation is entirely independent of the other. The latter obligation is not
subordinated to nor does it depend upon the fulfillment of the obligation to perfect the title
deeds of the property.
Certainly, non-payment of the purchase price constitutes a very good reason to rescind a sale, for it violates the
very essence of the contract of sale.
By the contract of sale one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefor a price certain in money or
[26]
its equivalent. Newmiso
We have consequently held that the nonpayment of the purchase price is a resolutory condition, for which the
[27]
remedy is either rescission or specific performance under Article 1191. This is true for reciprocal obligations,
[28]
where the obligation of one is a resolutory condition of the other.
In reversing the trial court, the Court of Appeals in the case at bench held that:
The trial court committed a reversible error when it ordered appellants to accept the amount
consigned by appellee with the Clerk of Court as full payment for the two lots sold by appellants
to appellee. Appellee's deliberate refusal to pay appellants the purchase price for the two lots for
nine (9) long years can not just be regarded as a casual, but substantial and fundamental breach
of obligation which defeats the object of the parties. Such substantial and fundamental breach of
obligation committed by appellee gave appellants, under the law, the right to rescind the
contract or ask for its specific performance, in either case with right to demand performance
[sic].
In the case at bench, appellants were justified in electing rescission instead of specific
performance. The deliberate failure of appellee to pay the purchase price for nine (9) long years
after the registration of the Deed of Absolute Sale, and the subsequent issuance of a clean title
to appellee constitutes a serious and unjustified breach of obligation. In the case of Siy vs. Court
of Appeals, 138 SCRA 536, the Supreme Court held: Acctmis
It is noteworthy to mention that in their answer to the petitioner's complaint,
the respondents prayed for the annulment of both the Deed of Conditional Sale
(Exh. A) and the Deed of Sale with Assumption of Mortgage (Exh. G) which
are the very bases of the supplemental agreements (Exhs. '1' , '2' and '5')
executed between the petitioner and the respondent. The technical argument
that the respondents never prayed for the rescission of the contracts and that
the trial court and the appellate court should never have rescinded the same
has no merit. Furthermore, by failing to pay the amount of P12,000.00 and the
balance of P4,376.00 as stipulated in the contract within the forty-five (45) days
period, the petitioner clearly committed a breach of contract which sufficiently
and justly entitled the respondents to ask for the rescission of the contracts. In
the case of Nagarmull v. Binalbagan Isabel Sugar Co., Inc. (33 SCRA 52), we
ruled that "x x x The breach of contract committed by appellee gave appellant,
under the law and even under general principles of fairness, the right to rescind
the contract or to ask for its specific performance, in either case with right to
demand damages x x x". It is evident, in the case at bar, that the respondents

chose to rescind the contracts after the petitioner repeatedly failed to pay not
only the balance but the initial amount as downpayment in consideration of
which the contracts or agreements were executed. As a matter of fact, the
petitioner later asked the SSS to cancel his loan application. He thereby
abandoned his own claim for specific performance. Therefore, the appellate
court correctly affirmed the rescission of the above-mentioned contracts. It
also correctly affirmed the payment of attorney's fees. While the petitioner
may not have acted in bad faith in filing his complaint, still the payment of
attorney's fees is warranted in this case because of the environmental
circumstances which compelled the respondents to litigate for the protection
of their interests [citations omitted].
While appellants are entitled to their claim for attorney's fees, they are not entitled to an award
of damages because they were not able to substantiate their claim for damages to have suffered
due to the failure of appellee to pay the purchase price of the two lots after the registration of
the Deed of absolute Sale with the Register of Deeds of Legaspi City, and the issuance of a clean
title to appellee covering the two lots. xxxx
xxx......xxx......xxx......xxx
In order that damages may be recovered, the best evidence obtainable by the injured party must
be presented. Actual or compensatory damages cannot be presumed, but must be proved with
reasonable degree of certainty. A court cnnot [sic] rely on speculation, conjecture or guesswork
as to the fact and amount of damages, but must depend upon competent proof that they have
been suffered and on evidence of the actual amount. If the proof is flimsy and unsubstantial, no
[29]
damages will be awarded [citation omitted].
We disagree with the appellate court. Misact
By law, "[t]he vendee is bound to accept the delivery and to pay the price of the thing sold at the time and place
[30]
stipulated in the contract." In the case at bench, petitioner's obligation to pay arose as soon as the deed of sale
was registered and a clean title was issued. However, petitioner justifies non-payment on respondents' breach of
several stipulations in the contract. We have examined these alleged violations vis-a-vis the pertinent provisions of
the deed of sale, keeping in mind that only a substantial breach of the terms and conditions thereof will warrant
[31]
rescission. Whether a breach is substantial is largely determined by the attendant circumstances.
Petitioner contends that it was entitled to retain the purchase price due to respondents' failure to pay the capital
gains and documentary stamp taxes and other transfer fees. We have read and examined the contract of sale and
we have found nothing therein to show that payment of the said taxes and fees to be conditions precedent to
petitioner's duty to pay. The stipulation is a standard clause in most contracts of sale and is nothing more than a
specification of the party who shall bear such fees and taxes.
Petitioner likewise insists that its delay in paying the purchase price was justified since a squatters occupied the
premises, contravening the stipulation that the respondent vendors shall convey the properties free from liens and
encumbrances. Again, we cannot support petitioner's view. The squatter's illegal occupation cannot be deemed a
lien or encumbrance. By the express terms of Article 1590 of the Civil Code, a mere act of trespass will not
authorize the suspension of payment of the price. Be that as it may, the usurpation became moot and academic
[32]
when the squatters left of their own volition in 1988 following a storm.
So far, what emerges as clear is that petitioner's obligation to pay was not subject to the foregoing "conditions,"
only that its demandability is suspended until the opportune time. That arrived upon the registration of the deed

of sale and the issuance of a clean title in favor of the petitioner. Relative thereto, the notice of adverse claim
[33]
and lis pendens became moot issues because they were cancelled less than a year after their inscription. Sdjad
We now consider petitioner's final argument, to wit, that it was not obliged to pay until respondents compact the
lots to street level with escombro free from waste material. Taking into account the facts of the case, we find that
particular argument of petitioner to be well-taken. The use to which the parcels of land was to be devoted was no
secret between the parties. The consolidated estate, which incorporated the lots sold by respondents to
petitioner, was intended as the site of petitioner's regional office to serve the Bicol region. The project had its
peculiar requirements, not the least of which was that since a substantial edifice was to be built on the property,
the site had to be made suitable for the purpose. Thus, petitioner specified that the lots be filled up in the manner
specified in paragraph 4 of the contract. The importance thereof could not have been lost on respondents.
Evidently then, respondents were guilty of non-performance of said stipulation. The deed of sale expressly
stipulated that the vendors were to undertake, at their expense, the filling up of the lots with escombro free from
waste material compacted to the street level. This was to be accomplished upon the signing of the contract and
insofar as petitioner was concerned, respondents' obligation was demandable at once. Other than his testimony,
Alfonso Bichara offered no proof tending to show that he had complied in the manner agreed upon. Although he
did state that he saw no need to comply with the stipulation because the parcels of land were already level with
[34]
the street, it was still not shown that the same were in a condition suitable for the construction of petitioner's
regional office. We find it hard to believe that the deed of sale would have specified the nature, quantity and
quality of the filling material were it not to prepare the lots for the construction. Where the terms of a contract are
[35]
clear, they should be fulfilled according to the literal tenor of their stipulation. If indeed it were true that the lots
were already at street level, petitioner would not have incurred the additional cost of P45,000.00 for having them
filled up by the BGV Corporation.
On the other hand, respondents argue that, as proof of petitioner's bad faith, the latter could have undertaken the
[36]
[37]
filling up of the lots as early as 1989, when it would have cost only about P9,000.00. The trial court concurred
[38]
with this view. But we disagree. Petitioner was under no duty to have done, at the least cost to the latter, what
was clearly respondents' obligation from the very beginning. If petitioner was forced to have the subject parcels of
land filled up by another party, and subsequently bill respondents, the former was entitled to do so by
[39]
right. Respondents are not in a position to question the resulting expense. Had they performed their obligation
under the contract of sale at the proper time, the expense would surely have been even less than the P9,000.00
estimate in 1989. Sppedsc
In this context, the appellate court erred in decreeing the rescission, otherwise called resolution, of the the subject
deed of sale. Respondents should not be allowed to rescind the contract where they themselves did not perform
their essential obligation thereunder. It should be emphasized that a contract of sale involves reciprocity between
the parties. Since respondents were in bad faith, they may not seek the rescission of the agreement they
[40]
themselves breached. Consequently, the decision rendered by the trial court should be reinstated as being just
and proper under the premises.
WHEREFORE, judgment is hereby rendered REVERSING and SETTING ASIDE the Decision dated February 28, 1997
of the Court of Appeals. The Decision dated October 26, 1993 rendered by the Regional Trial Court of Legazpi City
in Civil Case No. 8645 is hereby REINSTATED. No pronouncement as to costs.
SO ORDERED. DE LEON, JRJ
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

G.R. No. 142310

September 20, 2004

ARRA REALTY CORPORATION and SPOUSES CARLOS ARGUELLES and REMEDIOS DELA RAMA
ARGUELLES, petitioners,
vs.
GUARANTEE DEVELOPMENT CORPORATION AND INSURANCE AGENCY and ENGR. ERLINDA
EALOZA,respondents.
DECISION
CALLEJO, SR., J.:
Arra Realty Corporation (ARC) was the owner of a parcel of land, located in Alvarado Street, Legaspi Village, Makati
1
City, covered by Transfer Certificate of Title (TCT) No. 112269 issued by the Register of Deeds. Through its
president, Architect Carlos D. Arguelles, the ARC decided to construct a five-story building on its property and
engaged the services of Engineer Erlinda Pealoza as project and structural engineer. In the process, Pealoza and
the ARC, through Carlos Arguelles, agreed on November 18, 1982 that Pealoza would share the purchase price of
one floor of the building, consisting of 552 square meters for the price of P3,105,838: P901,738, payable within
sixty (60) days from November 20, 1982, and the balance payable in twenty (20) equal quarterly installments
of P110,205. The parties further agreed that the payments of Pealoza would be credited to her account in partial
2
payment of her stock subscription in the ARCs capital stock. Sometime in May 1983, Pealoza took possession of
3
the one-half portion of the second floor, with an area of 552 square meters where she put up her office and
operated the St. Michael International Institute of Technology. Unknown to her, ARC had executed a real estate
mortgage over the lot and the entire building in favor of the China Banking Corporation as security for a loan on
4
5
May 12, 1983. The deed was annotated at the dorsal portion of TCT No. 112269 on June 3, 1983. From February
23, 1983 to May 31, 1984, Pealoza paid P1,175,124.59 for the portion of the second floor of the building she had
6
purchased from the ARC. She learned that the property had been mortgaged to the China Banking Corporation
sometime in July 1984. Thereafter, she stopped paying the installments due on the purchase price of the property.
Pealoza wrote the China Banking Corporation on August 1, 1984 informing the bank that the ARC had conveyed a
portion of the second floor of the building to her, and that she had paid P1,175,124.59 out of the total price
ofP3,105,838. She offered to open an account with the bank in her name in the amount of P300,000, and to make
monthly deposits of P50,000 each, to serve as payments of the equivalent loan of the ARC upon the execution of
the appropriate documents. She also proposed for the bank to assist her in requesting the ARC to execute a deed
of absolute sale over the portion of the second floor she had purchased and the issuance of the title in her name
7
8
upon the payment of the purchase price. However, the bank rejected her proposal. She then wrote the ARC on
August 31, 1984 informing it of China Banking Corporations rejection of her offer to assume its equivalent loan
from the bank and reminded it that it had conformed to her proposal to assume the payment of its loan from the
bank up to the equivalent amount of the balance of the purchase price of the second floor of the building as
agreed upon, and the consequent execution by the ARC of a deed of absolute sale over the property in her
9
favor. Pealoza then sent a copy of a deed of absolute sale with assumption of mortgage for the ARCs
10
consideration, and informed the latter that, in the meantime, she was withholding installment payments. On
October 3, 1984, Pealoza transferred the school to another building she had purchased, but retained her office
11
therein. She later discovered that her office had been padlocked. She had the office reopened and continued
holding office thereat. To protect her rights as purchaser, she executed on November 26, 1984 an affidavit of
adverse claim over the property which was annotated at the dorsal portion of TCT No. 112269 on November 27,
12
13
1984. However, the adverse claim was cancelled on February 11, 1985.
When the ARC failed to pay its loan to China Banking Corporation, the subject property was foreclosed
extrajudicially, and, thereafter, sold at public auction to China Banking Corporation on August 13, 1986
14
forP13,953,171.07. On April 29, 1987, the ARC and the Guarantee Development Corporation and Insurance
Agency (GDCIA) executed a deed of conditional sale covering the building and the lot for P22,000,000, part of

15

which was to be used to redeem the property from China Banking Corporation. With the money advanced by the
16
GDCIA, the property was redeemed on May 4, 1987. On May 14, 1987, the petitioner executed a deed of
17
absolute sale over the lot and building in favor of the GDCIA for P22,000,000. The ARC obliged itself under the
deed to deliver possession of the property without any occupants therein. The Register of Deeds, thereafter,
issued TCT No. 147846 in favor of the GDCIA over the property without any liens or encumbrances on May 15,
18
1987. Of the purchase price of P22,000,000, the GDCIA retained P1,000,000 to answer for any damages arising
from any suits of the occupants of the building.
On May 28, 1987, Pealoza filed a complaint against the ARC, the GDCIA, and the Spouses Arguelles, with the
Regional Trial Court of Makati, Branch 61, for "specific performance or damages" with a prayer for a writ of
preliminary injunction.
Pealoza prayed for the following reliefs:
WHEREFORE, it is most respectfully prayed of this Honorable Court that
1.- Before hearing, a temporary restraining order immediately issue;
2.- After notice and hearing, and the filing of an injunction bond, a preliminary injunction be
issued forthwith enjoining and restraining the defendant Register of Deeds for Makati, Metro
Manila, from receiving and registering any document transferring, conveying, encumbering or,
otherwise, alienating the land and edifice covered by Transfer Certificate of Title No. 112269 of
said Registry of Deeds and from issuing a new title therefor;
3.- After hearing and trial
(a) Ordering defendants ARRA and Arguelles to execute a deed of sale in favor of
plaintiff over the second floor of that 5-storey edifice built on 119 Alvarado Street,
Legaspi Village, Makati, Metro Manila, simultaneously with the tender of the remaining
balance on the purchase price thereon;
(b) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff
such moral damages as may be proved during the trial;
(c) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff
exemplary damages in such amount as may be deem (sic) just, sufficient and equitable
as exempary (sic) damages;
(d) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff an
amount equivalent to 20% of whatever she may recover herein as and for attorneys
fees;P500.00 per appearance of counsel in Court; and miscellaneous litigation expenses
and cost of suit;
4.- On the Alternative Cause of Action, in the event that specific performance cannot be effected
for any reason, to render judgment in favor of the plaintiff and against the defendants
(a) Ordering the defendants, jointly and reveraaly (sic), to restitute to the plaintiff the
sum ofP1,444,124.59 with interest thereon at bank borrowing rate from August 1984
until the same is finally wholly returned;

(b) Ordering the defendants, jointly and severally, to pay the plaintiff the difference
between the selling price on the second floor of the 5-storey edifice after
deducting P1,444,124.59 therefrom;
(c) Directing defendant Guarantee Development Corporation & Insurance Agency to
deposit with the Honorable Court any amount still in its possession on the purchase
price of the land and the 5-storey edifice in question;
(d) Ordering the defendants, jointly and severally, to pay the plaintiff moral and
exemplary damages as may be proved during the trial and/or as this Honorable Court
may deem just, adequate and equitable in the premises;
(e) Ordering the defendants, jointly and severally, to pay the plaintiff an amount
equivalent to 20% of whatever she may recover from the defendants in this suit as and
for attorneys fees, litigation expenses and costs.
PLAINTIFF further prays for such other reliefs and remedies as may be just and equitable in the premises

19

On her first cause of action, Pealoza alleged, inter alia:

2.- That on or about November 18, 1982, the plaintiff and defendant ARRA represented by its President
and General Manager, defendant Arguelles, entered into an agreement whereby for and in consideration
of the amount of P3,105,828.00 on a deferred payment plan payable in five (5) years, defendants ARRA
and Arguelles agreed to sell to the plaintiff one (1) whole floor of a prospective 5-storey building which
said defendants planned to build on a 992 square meter lot located at 119 Alvarado Street, Legaspi
Village, Makati, Metro Manila, covered by Transfer Certificate of Title No. 112269 of the Registry of Deeds
for Makati, Metro Manila, copy of which agreement is hereto attached as Annex "A" and made integral
part hereof ;
3.- That consonant with the aforementioned agreement between the plaintiff and defendants ARRA and
Arguelles, the former paid to said defendants the total amount of P1,377,124.59 as evidenced by receipts
and cash vouchers copies of which are hereto attached as Annexes "B," "B-1" to "B-10" and made integral
parts hereof;
4.- That upon completion of the 5-storey edifice on May 31, 1984, the plaintiff made her choice of the
second floor thereof as the subject matter or object of the sale in her favor, and with the express
knowledge and consent of defendants ARRA and Arguelles, she immediately took possession and
occupied the same as contained in a certification to said effect of the defendants, and where they further
certified that the certificate of condominium corresponding to the second floor "is presently under
process," copy of said certification is hereto attached as Annex "C" hereof;
5.- That sometime in August 1984, the plaintiff learned that the defendants ARRA and Arguelles,
conspiring with one another in a clear and unmistakeably (sic) scheme to defraud the plaintiff of her
investment on the second floor of the 5-storey edifice, mortgaged the land and the building covered by
Transfer Certificate of Title No. 112269 of the Registry of Deeds for Makati, Metro Manila, with the China
Banking Corporation in order to secure the payment of their loan in the total sum of P6,500,000.00
without the knowledge and/or consent of the plaintiff;
6.- That after verifying the fact of mortgage with the China Banking Corporation and realizing the risk of
loss of her investment of P1,377,124.59 she had so far paid on the purchase price of the second floor of
the 5-storey edifice, the plaintiff wrote the defendants ARRA and Arguelles on August 31, 1984 proposing

to defendants ARRA and Arguelles the execution of a deed of sale with assumption of mortgage in her
favor of the portion of the loan corresponding to the second floor of the said edifice and informing them
of her resolve to hold further payments on the purchase price of the second floor until her rights and
interest over the same shall have been adequately and properly secured, copy of said letter is hereto
attached as Annex "D" hereof;
7.- That in order to facilitate the transaction and expeditious execution of the sale over the second floor in
her favor, the plaintiff had a Deed of Sale with Assumption of Mortgage prepared and forwarded the
same to defendants ARRA and Arguelles for their consideration and signature with an accompanying
letter therefor dated September 25, 1984, copy of said draft of a deed of sale with assumption of
mortgage and the accompanying letter therefor are hereto attached as Annexes "E" and"E-1,"
respectively;
8.- That by reason of the unjustified, unwarranted and malicious inaction and/or refusal and failure of the
defendants ARRA and Arguelles to comply with plaintiffs perfectly valid and legal demand for the
execution of a document of sale over the second floor of the 5-storey edifice, and in order to protect her
rights and interest in said transaction, the plaintiff caused to be prepared and executed an affidavit of
Adverse Claim and effected the annotation thereof on Transfer Certificate of Title No. 112269 of the
20
Registry of Deeds for Makati, M.M., copy of said Adverse Claim is hereto attached as Annex "F" hereof.
On her second cause of action, Pealoza alleged, as follows:
9.- That after her occupation and taking possession of the second floor of the said 5-storey edifice, the
plaintiff caused the installation of a water tank and water pumps thereto;
10.- That the water tank installed on the second floor of the 5-storey edifice involved an outlay
ofP15,000.00 as evidenced by Cash Vouchers, copies of which are hereto attached as Annexes "G" and "G1," while the water pumps involved the disbursement of P52,000.00 from the funds of the plaintiff as
evidenced by Cash Vouchers, copies of which are hereto attached as Annexes "H," "H-1" hereof;
11.- That when the defendants ARRA and Arguelles mortgaged with (sic) land and the 5-storey edifice to
the China Banking Corporation, the mortgage included the water tank and water pumps servicing the
21
second floor thereof installed by the plaintiff;
Pealoza caused the annotation of the notice of lis pendens at the dorsal portion of TCT No. 112269.
The GDCIA interposed the following affirmative and special defenses in its answer to the complaint:
26. Guarantee acquired clean title to the Property, as evidenced by the transfer certificate of title
attached as Annex 4 hereof.
27. Guarantee was an innocent purchaser for value and in good faith of the Property who: (i) verified that
the title to the Property in the Registry of Deeds of Makati was absolutely free and clear of any
encumbrances, liens or claims other than the mortgage to China Banking Corporation; and, (ii) even
obtained explicit confirmation of that fact from Arra and Arguelles.

30. Consequently, Guarantee could rely, as it did, on the absence of any annotation of encumbrance on
the title to the Property. By clear provision of law, the present action, which is a collateral attack on the
title to the Property in question, cannot be allowed by the Court.

31. The complaint (para. 6) admits that plaintiff was unable to pay the purchase price for the portion of
the building which she allegedly bought under the letter agreement with Arra dated November 18, 1982
(Annex "A," Complaint). Assuming plaintiffs agreement with Arra to be valid and enforceable, her failure
to discharge her part of the agreement bars her from now attempting to compel performance from Arra
and Arguelles.
32. Plaintiffs remedy, should her claim, indeed, be meritorious, is a personal action for damages against
22
Arra and Arguelles.
The GDCIA prayed that, after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that, after due hearing, judgment be rendered:
(i) Dismissing the complaint for lack of merit;
(ii) Ordering plaintiff to pay attorneys fees in such amount as may be proven in the course of
trial;
(iii) Ordering plaintiff to pay to Guarantee the amount of P500,000.00 as moral damages;
or, in the alternative, should plaintiffs claim be adjudged meritorious,
(iv) Ordering defendants Arra and Arguelles, solidarily, to return the purchase price of the
Property with interest as stated in the Deed of Conditional Sale;
(v) Ordering defendants Arra and Arguelles, solidarily, to pay to Guarantee the amount
ofP1,000,000.00 as punitive and exemplary damages;
(vi) Ordering defendants Arra and Arguelles to pay attorneys fees in such amount as may be
proven in the course of trial;
(vii) Ordering defendants Arra and Arguelles to pay to Guarantee the amount of P500,000.00 as
moral damages.
Other just and equitable reliefs are prayed for.

23

The ARC and the Spouses Arguelles interposed the following special and affirmative defenses:
10. Plaintiff has no cause of action against answering defendants; her complaint is definitely a nuisance
suit;
11. When answering defendants decided to erect a 5-storey building on their lot in 1982, plaintiff and
answering defendants agree that plaintiff will share in the construction of any one (1) floor thereof;
hence, the agreement between them (Annex "A");
12. Plaintiff not only refused and failed to comply with her Agreement despite repeated demands but also
grossly violated said agreement as she paid only an initial amount of P200,000.00 on February 7, 1982 in
contrary to the specific, express decisive stipulation in Annex "A" which was synchronized with the
agreement of Answering Defendants with the contractor of the building, Pyramid Construction &
Engineering Corp., who was committed to finish the building in a period of five (5) months;

13. Having committed to construct the 5-storey edifice on their lot, answering defendants has (sic) to
raise the required initial amount to start the construction and for this reason, they were constrained to
borrow the rest of the amount necessary for the completion of the building and they used their own land
and the building itself as collateral to enable defendant Arguelles to finish the building plus his own
funding in the amount of P7,000,000.00;
14. Despite her non-compliance with her agreement, plaintiff, on her own and without the consent of
answering defendants, occupied the second floor of the building and converted the same into a school
the St. Michael International School and other business establishments whereby she earned no less
thanP3,000,000.00 in a period of four (4) years of her occupancy as a squatter thereof without paying the
rentals to answering defendants;
15. Due to plaintiffs persistent requests for the issuance in her favor of a certification of her occupancy of
the second floor to enable her to secure a loan in the amount of P3,105,838.00 to complete payment of
her obligation, defendant Carlos Arguelles, always a kind and understanding person, issued Annex "C"
with the expectation that plaintiff could, indeed, comply with her agreement within a period of three (3)
months as she promised;
16. Having failed to fulfill her promise and to comply with her obligation as mentioned in the immediately
preceding paragraph hereof, plaintiff voluntarily vacated the second floor of the said building on (sic) May
1986;
17. As a consequence of plaintiffs violation of her written agreement, answering defendants naturally
defaulted in their mortgage obligation with China Banking Corporation and answering defendants lot and
building were, therefore, foreclosed by said bank and having no means of redeeming the mortgaged
properties within the redemption period, answering defendants were compelled to negotiate for the sale
of the foreclosed properties which sale was monitored to the plaintiff together with her statement of
account;
18. That the negotiation for the sale of the building took almost a year and during such period, plaintiff
was cooperative in showing the second floor which she was then occupying to prospective buyers;
19. Whatever right plaintiff may have acquired over the second floor of the subject 5-storey building has
been extinguished upon her failure to comply with her obligation, which was the payment of the total
24
amount of P3,105,838.00 within the specific period expressly provided as the essence of the agreement.
The ARC and the Spouses Arguelles also interposed counterclaims against the GDCIA, while the latter secured a
writ of preliminary attachment against its co-defendants and garnished their funds. On April 17, 1995, the trial
court rendered judgment in favor of Pealoza and the GDCIA, and against the ARC and the Spouses Arguelles, thus:
WHEREFORE, premises above considered, judgment is hereby rendered as prayed for by plaintiff
PEALOZA in the case for SUM OF MONEY as against defendants ARRA and SPOUSES CARLOS D.
ARGUELLES and REMEDIOS DELA RAMA-ARGUELLES, who are hereby ORDERED as follows:
1. TO PAY plaintiff the amount of P1,444,124.59 with interest of 12 per centum per annum from
August 1984 until fully paid;
2. TO PAY the amount of P150,000.00 for and as attorneys fees; and
3. TO PAY the Costs of the proceedings.

The case for SPECIFIC PERFORMANCE and prayer for PRELIMINARY INJUNCTION are considered as
DISMISSED on grounds that this case for this alternative relief was filed after the Transfer Certificate of
Title of the property was already issued by defendant Register of Deeds in the name of GUARANTEE.
The case as against DEFENDANT Guarantee Development Corporation & Insurance Agency (GUARANTEE)
is hereby DISMISSED for insufficiency of evidence.
The counterclaims of DEFENDANTS are hereby DISMISSED for insufficiency of evidence.
SO ORDERED.

25

Pealoza, as well as the ARC and the Spouses Arguelles, appealed the decision to the Court of Appeals (CA). The
ARC and the Spouses Arguelles alleged that the Regional Trial Court (RTC) erred as follows:
I IN NOT ANNULLING OR RESCINDING THE CONDITIONAL DEED OF SALE OF REALTY DATED APRIL 29, 1987
AND DEED OF ABSOLUTE SALE DATED MAY 14, 1999;
II IN NOT ORDERING THE DEFENDANT GUARANTEE DEVELOPMENT AND INSURANCE AGENCY TO PAY
DEFENDANTS-APPELLANTS FOR THE MALICIOUS AND UNFOUNDED FILING OF WRIT OF ATTACHMENT
AND GARNISHMENT; AND
III IN NOT DIRECTING PACES TO PAY ARRA REALTY AND SPOUSES ARGUELLES ARREARS IN RENTALS PLUS
26
INTERESTS AND DISMISSING THE ORIGINAL AND AMENDED COMPLAINTS.
The CA rendered judgment, on September 30, 1998, affirming with modification the appealed decision. The fallo
reads:
WHEREFORE, the appeals of both ARRA Realty Corporation and plaintiff Engineer Erlinda Pealoza are
hereby DISMISSED, and the Decision of the lower court is hereby AFFIRMED but the award of P150,000.00
as attorneys fees in favor of said plaintiff is deleted. The Register of Deeds of Makati City is hereby
ordered to cancel the Notice of Lis Pendens annotated on Transfer Certificate of Title No. 147845
27
registered in the name of Guarantee Development Corporation and Insurance Agency.
The ARC and the Spouses Arguelles filed a motion for reconsideration of the decision of the CA on the following
grounds:
1.) THIS HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT PEALOZAS ACTION WAS
TANTAMOUNT TO FORFEITURE OR WAIVER OF HER RIGHTS.
2.) THIS HONORABLE COURT OF APPEALS ERRED IN NOT APPRECIATING THE EVIDENCE OF CODEFENDANTS ARRA/ARGUELLES ESPECIALLY THE ARREARS IN RENTALS/OUT OF POCKET ADVANCES WITH
28
THE RESULTANT UNJUST ENRICHMENT ON THE PART OF PEALOZA.
However, the appellate court denied the said motion. Pealoza filed a petition for review on certiorari with this
Court docketed as G.R. No. 136876, wherein she made the following assignment of errors:
I
The Court of Appeals gravely erred in finding respondent Guarantee an innocent purchaser for value and
in good faith contrary to settled jurisprudence that a buyer of a parcel of land who did not pay the

purchase price in full and who could not have failed to know or discover that the land sold to him was in
the adverse possession of another is a buyer in bad faith.
II
The Court of Appeals gravely erred in finding that petitioner, who had established her legal right for sum
of money against respondents Arra and the Arguelles spouses, may be effectively barred from pursuing
her alternative remedy for recovery of title against respondent Guarantee contrary to Section 2, Rule 8 of
the Rules of Court.
III
The Court of Appeals gravely erred in not awarding damages and attorneys fees despite violation of the
29
rights of the petitioner on the wrongful or fraudulent action on the part of the respondents.

WHEREFORE, premises considered, it is respectfully prayed that the Decision of the Court of Appeals in
CA-G.R. CV No. 52911 dated September 30, 1998 as well as its Resolution dated December 23, 1998 be
reversed and set aside and that a Decision be rendered:
1. Declaring as null and void the title of Guarantee (TCT No. 147845) over the subject property
located at No. 119 Alvarado St., Legaspi Village, Makati, Metro Manila.
2. Ordering respondents to execute a Deed of Sale in favor of the petitioner covering the subject
second floor of the subject property simultaneously with the tender of the remaining balance on
the purchase price.
3. Ordering respondents, jointly and severally, to pay petitioner moral and exemplary damages of
One Million Pesos (P1,000,000.00).
4. Ordering respondents, jointly and severally, to pay petitioner attorneys fees of ten (10%)
percent of the amount involved.
On the alternative cause of action, in the event that specific performance cannot be affected, to render
judgment:
1. Ordering respondents, jointly and severally, to pay petitioner the sum of P1,944,124.59 with
interest of twelve (12%) percent from August 1984 until fully paid.
2. Ordering respondents, jointly and severally, to pay moral and exemplary damages of One
Million Pesos (P1,000,000.00).
3. Ordering respondents, jointly and severally, to pay attorneys fees of ten (10%) percent of the
amount involved.
Such other reliefs just and proper are, likewise, prayed for.

30

On March 15, 1999, the Court resolved to deny due course to the petition for failure of the petitioner therein to
show any reversible error committed by the CA in its decision. Entry of judgment was made of record on April 14,
31
1999.
For their part, the ARC and the Spouses Arguelles, now the petitioner, filed their petition for review with this
Court, contending that:
I
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT NO
PERFECTED CONTRACT EXISTS BETWEEN ARRA REALTY CORPORATION AND ENGINEER ERLINDA
PEALOZA.
II
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT
GUARANTEE DEVELOPMENT CORPORATION IS NOT AN INNOCENT PURCHASER FOR VALUE AND THAT
32
AUTOMATIC RESCISSION IS PRESENT.
III
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT
ENGINEER ERLINDA PEALOZA IS GUILTY OF FRAUD AND IS IN BAD FAITH. HENCE, LIABLE FOR DAMAGES.
At the outset, it must be pointed out that the issues raised by the parties in their respective pleadings in this Court
have already been resolved in G.R. No. 136876, where we denied due course to Pealozas petition for review.
Nonetheless, considering that the sole petitioner in the said case was Pealoza, whereas the petitioners in the
petition at bar are the ARC and the Spouses Arguelles, we shall resolve the petition on its merits. Furthermore,
since the issues raised by the petitioners in their assignment of errors are interrelated, the Court shall delve into
and resolve the same simultaneously.
The petitioners posit that no contract of sale over the subject property was perfected between the petitioner ARC,
on the one hand, and respondent Pealoza, on the other, because the latter failed to pay the balance of the total
purchase price of a portion of the second floor of the building as provided in their November 18, 1982 agreement.
They aver that respondent Pealoza bound and obliged herself to pay the downpayment of P901,738 on or before
January 1983, and the balance in twenty (20) equal quarterly payments of P110,205. However, the petitioners
aver, respondent Pealoza was able to complete the downpayment only on March 4, 1983 and managed to pay
only three quarterly installments, and part of the fourth quarterly installment. They assert that, in violation of the
November 18, 1982 agreement, respondent Pealoza used the property as a school instead of an office, and later
abandoned the same without prior notice to the petitioner ARC. The petitioners assert that respondent Pealoza
failed to pay for the advances extended to her, amounting to P302,753.06 inclusive of interests, as well as rentals
for her occupancy of the property in the total amount of P2,177,935. The petitioners contend that, even if the
payments of respondent Pealoza amounting to P1,735,500 would be deducted from the agreed purchase price,
she would still end up owing the petitioner ARC the net amount of P930,815.56, excluding interests. They aver that
respondent Pealoza should be ordered to pay damages under Article 19 of the New Civil Code because she acted
in bad faith, and pray that the payments she made to the petitioner ARC for the purchase of the said portion of the
building be forfeited in its favor.
The petitioners further contend that respondent GDCIA was a purchaser of the property in bad faith because it
purchased the lot and building despite its presumed knowledge of the claims of respondent Pealoza and the fact
that the building was occupied by private individuals and/or corporations. The petitioners aver that they even

offered to return the P21,000,000 paid by the respondent GDCIA for the property, less the retained P1,000,000,
but that the latter rejected the offer. Hence, the deed of absolute sale executed by the petitioner ARC and the
respondent GDCIA over the property was automatically rescinded.
In her comment on the petition, respondent Pealoza averred that her November 18, 1982 agreement with the
petitioner ARC is a perfected contract of sale. She asserts that the CA erred in holding that she was barred from
recovering the property from the respondent GDCIA and in not finding that the latter is not an innocent purchaser
in good faith because, by its own admission, it purchased the building although it was still occupied. In fact, she
notes, the respondent GDCIA retained P1,000,000 of the purchase price of the property to answer for any claims
for damages of the said occupants. She prayed, thus:
WHEREFORE, premises considered, it is respectfully prayed that the petition be denied and that the
Decision of the Court of Appeals in CA-G.R. CV No. 52911 dated September 30, 1998 as well as its
Resolution dated February 21, 2000 be modified in that:
1. Declaring as null and void the title of Guarantee (TCT No. 147845) over the subject property
located at No. 119 Alvarado St., Legaspi Village, Makati, Metro Manila.
2. Ordering petitioners and respondent Guarantee to execute a Deed of Sale in favor of the
petitioner covering the subject second floor of the subject property simultaneously with the
tender of the remaining balance on the purchase price.
3. Ordering petitioners and respondent Guarantee, jointly and severally, to pay Pealoza moral
and exemplary damages of One Million Pesos (P1,000,000.00).
4. Ordering petitioners and respondent Guarantee, jointly and severally, to pay Pealoza
attorneys fees of ten (10%) percent of the amount involved.
In the alternative, in the event that specific performance cannot be affected, to render judgment:
1. Ordering petitioners and respondent Guarantee, jointly and severally, to pay petitioner the
sum ofP1,944,124.59 with interest of twelve (12%) percent from August 1984 until fully paid.
2. Ordering petitioners and respondent Guarantee, jointly and severally, to pay moral and
exemplary damages of One Million Pesos (P1,000,000.00).
3. Ordering petitioners and respondent Guarantee, jointly and severally, to pay attorneys fees of
ten (10%) percent of the amount involved.
Such other reliefs just and proper are, likewise, prayed for.

33

In its comment on the petition, the respondent GDCIA avers that the issues raised by the petitioners and
respondent Pealoza in her Comment had already been resolved by this Court in G.R. No. 136876, when the
petition therein was denied due course.
We rule against the petitioners.
Central to the issue is the November 18, 1982 letter-agreement of the parties, which reads:

Ms.
5th
Flr.
Salcedo
Makati, Metro Manila

Erlinda
ODC

Intl.

St.,

Plaza
Legaspi

Pealoza
Bldg.
Village

Dear Linda:
I would like to review the arrangement arrived at our meeting yesterday afternoon. You shall
share one (1) floor of the proposed 5-storey office building to be constructed on a 992 sq. mt. lot
owned by ARRA Realty Corporation located at Alvarado St., Legaspi Village, Makati, Metro Mla.
The consideration for which you shall own one (1) floor is THREE MILLION ONE HUNDRED FIVE
THOUSAND EIGHT HUNDRED THIRTY-EIGHT PESOS (P3,105,838.00) on a deferred payment plan.
The initial payment of NINE HUNDRED ONE THOUSAND SEVEN HUNDRED THIRTY-EIGHT PESOS
(P901,738.00) shall be paid within sixty (60) days from November 20, 1982 and the balance
payable in 20 equal quarterly payments of ONE HUNDRED TEN THOUSAND TWO HUNDRED FIVE
PESOS (P110,205.00). Every payment that you make, ARRA shall credit your account by way of
partial payment to your stock subscriptions of ARRAs capital stock. As soon as our contractor,
Pyramid Construction and Engineering Corporation, complete its commitment with us, which is
not more than five (5) months, you shall immediately take possession of the floor of your choice.
Further, as soon as practicable, the Title corresponding to the floor that you own shall be
transferred to your name.
However, should you pay in full at the end of the fourth quarter or at any time prior to the 5-year
arrangement, the price shall be adjusted accordingly.
I believe that this accurately summarizes our understanding. If you have any questions or if I have
not properly stated our agreement, please let me know, otherwise, you may signify your
conformity by signing the duplicate copy of this letter.
Very truly yours,
(Sgd.)
CARLOS
D.
President & General Manager

ARGUELLES

CONFORME:
(Sgd.)

PL:FP:ccr

ERLINDA
34
Date: __________

PEALOZA

As gleaned from the agreement, the petitioner ARC, as vendor, and respondent Pealoza, as vendee, entered into
a contract of sale over a portion of the second floor of the building yet to be constructed for the price
ofP3,105,838 payable in installments, the first installment of P901,738 to be paid within sixty (60) days from
November 20, 1982 or on or before January 20, 1983, and the balance payable in twenty (20) equal quarterly
payments of P110,205. As soon as the second floor was constructed within five (5) months, respondent Pealoza
would take possession of the property, and title thereto would be transferred to her name. The parties had agreed
on the three elements of subject matter, price, and terms of payment. Hence, the contract of sale was perfected, it
being consensual in nature, perfected by mere consent, which, in turn, was manifested the moment there was a
35
meeting of the minds as to the offer and the acceptance thereof. The perfection of the sale is not negated by the
fact that the property subject of the sale was not yet in existence. This is so because the ownership by the seller of
the thing sold at the time of the perfection of the contract of sale is not an element of its perfection. A perfected

contract of sale cannot be challenged on the ground of non-ownership on the part of the seller at the time of its
perfection. What the law requires is that the seller has the right to transfer ownership at the time the thing is
delivered. Perfection per se does not transfer ownership which occurs upon the actual or constructive delivery of
36
the thing sold.
In May 1983, respondent Pealoza took possession of a portion of the second floor of the building sold to her with
an area of 552 square meters. She put up her office and operated the St. Michael International Institute of
Technology. Thenceforth, respondent Pealoza became the owner of the property, conformably to Article 1477 of
the New Civil Code which reads:
Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive
delivery thereof.
In a contract of sale, until and unless the contract is resolved or rescinded in accordance with law, the vendor
cannot recover the thing sold even if the vendee failed to pay in full the initial payment for the property. The
failure of the buyer to pay the purchase price within the stipulated period does not by itself bar the transfer of
37
ownership or possession of the property sold, nor ipso facto rescind the contract. Such failure will merely give
the vendor the option to rescind the contract of sale judicially or by notarial demand as provided for by Article
1592 of the New Civil Code:
Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure
to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee
may pay, even after the expiration of the period, as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act. After the demand, the court may not grant him
a new term.
Admittedly, respondent Pealoza failed to pay the downpayment on time. But then, the petitioner ARC accepted,
without any objections, the delayed payments of the respondent; hence, as provided in Article 1235 of the New
Civil Code, the obligation of the respondent is deemed complied with:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.
The respondent cannot be blamed for suspending further remittances of payment to the petitioner ARC because
when she pushed for the issuance of her title to the property after taking possession thereof, the ARC failed to
comply. She was aghast when she discovered that in July 1984, even before she took possession of the property,
the petitioner ARC had already mortgaged the lot and the building to the China Banking Corporation; when she
offered to pay the balance of the purchase price of the property to enable her to secure her title thereon, the
petitioner ARC ignored her offer. Under Article 1590 of the New Civil Code, a vendee may suspend the payment of
the price of the property sold:
Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should
he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of
mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or
danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been
stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment.
A mere act of trespass shall not authorize the suspension of the payment of the price.
Respondent Pealoza was impelled to cause the annotation of an adverse claim at the dorsal portion of TCT No.
112269. Her testimony is quoted, thus:

Q: And did you finally acquire the certificate of title to the 2nd floor of the said building?
A: No, Sir.
Q: Why not?
A: Because the said building was mortgaged by ARRA Realty and Architect Arguelles with China Banking
Corporation and subsequently sold to Guaranty (sic) Development Corporation.
Q: When, for the first time, did you learn about the mortgage of the building to China Banking Corp.?
A: It was sometime in July of 1984.
Q: How did you learn about it?
A: Since I took possession of the 2nd floor and made payments thereon, I asked Architect Arguelles every
now and then about the execution of a Deed of Sale to the 2nd floor.
Q: What was the reply of Arguelles?
A: He told me that he had to work out yet the titling of the 2nd floor as a condominium unit.
Q: Was Arguelles able to have the 2nd floor titled as a condominium unit?
A: No, Sir.
Q: Why not?
A: Because he did not take any steps about it.
Q: When Arguelles did not take steps about it, what did you do?
A: I inquired why Arguelles was not doing anything about the titling of the 2nd floor and the sale thereof
38
to me. That was how I discovered that Arguelles mortgaged the same to the China Banking Corp.

Q: With those letters, what did you do?

A: On August 31, 1984, I wrote a letter to ARRA requesting them to execute a deed of sale with the
assumption of mortgage in my favor. I attached a copy of the deed of sale and assumption of mortgage to
the said letter, may I request this letter be marked as Exh. "U" and the deed of sale attached to it with the
assumption of mortgage as Exh. "U-1."
Q: Did ARRA reply to your letter?
A: ARRA and Arguelles ignored the said letter.
Q: What did you do then?

A: On September 25, 1984, I wrote a letter to ARRA which I request to be marked as Exh. "V" reiterating
the signing of the deed of sale and at the same time telling him that I was suspending my payments on the
2nd floor unless and until he signs that Deed of Sale. I offered to pay the full amount so I can get the
certificate of title, because I had more than sufficient money to pay him at the time. Here are copies of my
bank deposits from 1982 to 1986 which show my liquidity. I request that they be marked as Exh. "W" and
"W-1" to "W-59" inclusive.
Q: What did ARRA do with that letter?
A: ARRA and Arguelles ignored the said letter.
Q: What steps did you take?
A: Upon [the] advise of my lawyer, I filed a Notice of Adverse Claim dated November 26, 1984, which I
request to be marked as Exh. "X" which was inscribed the next day, November 7, 1984, at the back of the
Certificate of Title No. 112269, which I request to be marked as Exh. "Y" and the inscription of the Notice
39
of Adverse Claim to be bracketed and marked as Exh. "Y-1."
Contrary to the claim of the petitioners, respondent Pealoza did not waive her right to enforce the letteragreement or abandon the property she had purchased from the petitioner ARC. While she transferred the school
to another location, the respondent maintained her office in the subject property, only to discover that the
petitioner had had her office padlocked. Nevertheless, she had her office reopened and continued holding office
thereat for a year or so, thereafter:
Q: In the meantime, did you continue holding office and holding classes for St. Michael on the 2nd floor?
A: Sometime in April of 1986 when classes ended I transferred the St. Michael School to a building which I
purchased at Yakal St. also in Makati.
Q: Why did you transfer the St. Michael School at that building in Yakal St.?
A: Because after three years of operation the St. Michael School has grown too big for the 2nd floor of
that building at 119 Alvarado.
Q: How about your Engineering Office?
A: My Engineering Office has also grown bigger, just right for that space at the 2nd floor, so it remained
there.
Q: So the office of Pealoza Engineering retained the Alvarado office?
A: Yes, Sir.
Q: After St. Michael left it, were you able to hold office there peacefully?
A: No, Sir.
Q: Why not?
A: One Monday, I went to our office at the 2nd floor at 119 Alvarado for work.

Q: Were you able to enter the office?

A: No, Sir.
Q: Why not?
A: Because the padlock that I placed there had been changed.
Q: How did you discover that?
A: Because when I was using my key to my padlock, it would not fit.
Q: What did you do?
A: I went to the office of Engr. Arguelles at ARRA Realty Corp. at the upper floor and asked them why they
changed the padlock. Nobody wanted to explain to me why the padlock was changed but they gave me
the key and I had it duplicated for my use, so I continued holding office there. I held office in the said
40
premises continuously for about a year. Later on, it was padlocked.
Respondent Pealoza turned over the possession of the property to the petitioner ARC on October 7, 1986 and,
shortly thereafter, filed her complaint against the petitioner ARC. The bare fact that the respondent filed her
complaint shortly after vacating the property is evidence of her determination to pursue her claims against the
petitioners.
In view of the failure of the petitioner ARC to transfer the title of the property to her name because of the
mortgage thereof to China Banking Corporation and the subsequent sale thereof to the GDCIA, respondent
Pealoza is entitled to the refund of the amount she paid to the petitioner ARC, conformably to Article 1398 of the
New Civil Code, which reads:
Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the
things which have been the subject matter of the contract, with their fruits, and the price with its interest,
except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
We reject the petitioners claim that respondent Pealoza is liable for P2,177,935 by way of advances and
unpaid rentals. We note that in their answer to the amended complaint of respondent Pealoza, the
petitioners did not interpose any counterclaims for actual damages in the form of unpaid rentals. Neither
did the petitioners assign as error in their brief in the CA the failure of the trial court to
award P302,753.06 to them for advances. It was only when they moved for the reconsideration of the
decision of the CA did they claim, for the first time on appeal, their entitlement to P302,753.06 as refund
41
for advances. The petitioner ARC is, thus, barred from raising the said issue in this Court.
Likewise barren of factual and legal basis is the petitioners claim for damages against the respondent based on
Article 19 of the New Civil Code, which reads:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

In this case, respondent Pealoza suspended the payment of the balance of the purchase price of the property
because she had the right to do so. While she failed to pay the purchase price on time, the petitioner ARC
nevertheless accepted such delayed payments. The respondent even proposed to assume the loan account of the
petitioner ARC with the China Banking Corporation in an amount equivalent to the balance of the purchase price of
the subject property, which the petitioner ARC rejected. In fine, respondent Pealoza acted in accord with law and
in utmost good faith. Hence, she is not liable for damages to the petitioners under Article 19 of the New Civil Code.
The law is that men, singly or in combination, may use any lawful means to accomplish a lawful purpose, although
42
the means adopted may cause injury to another. When a person is doing a lawful thing in a lawful way, his
conduct is not actionable though it may result in damages to another; for, though the damage caused is
43
undoubted, no legal right of another is invaded; hence, it is said to be damnum absque injuria.
The elements of abuse of rights are the following: (a) the existence of a legal right or duty, (b) which is exercised in
bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of said
44
45
provision. Good faith is presumed and he who alleges bad faith has the duty to prove the same. Good faith
refers to the state of the mind which is manifested by the acts of the individual concerned. It consists of the
46
intention to abstain from taking an unconscionable and unscrupulous advantage of another. Bad faith, on the
other hand, does not simply connote bad judgment to simple negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty due to some motive or interest or ill-will
47
that partakes of the nature of fraud. Malice connotes ill-will or spite and speaks not in response to duty. It
implies an intention to do ulterior and unjustifiable harm. The petitioners failed to adduce evidence of bad faith or
malice on the part of respondent Pealoza. This cannot be said of the petitioner ARC. It mortgaged the property to
China Banking Corporation even after having sold the same to respondent Pealoza, and, thereafter, sold the same
anew to GDCIA; respondent Pealoza was, thus, left holding the proverbial bag.
On the last issue, the petitioners contend that the deed of conditional sale and deed of absolute sale executed by
them and the respondent GDCIA were automatically nullified because the latter had actual or personal knowledge
that the property sold had tenants. Furthermore, the respondent GDCIA retained P1,000,000 on account of the
claims of respondent Pealoza, Paces Industrial Development Corporation, and Emeterio Samson over the portions
of the property.
The contention of the petitioners has no merit.
First. The petitioners did not file a counterclaim against the respondent GDCIA for the rescission of the aforesaid
48
decision. Moreover, the petitioners did not adduce evidence to prove bad faith on the part of the respondent
GDCIA. Additionally, the petitioners warranted in the aforesaid deeds in favor of the said respondent, that:
d) It is hereby agreed, convenanted and stipulated by and between the parties hereto that the VENDOR
will execute and deliver to the VENDEE a definite or absolute Deed of Sale upon the full payment by the
VENDEE of the unpaid balance of the purchase price hereinabove stipulated.
1. The VENDOR undertakes and commits to deliver the Property, including all floors of the building, as
entirely vacant to the VENDEE not later than May 15, 1987. Physical possession, however, of the first and
49
second floors of the Building can be turned over to the VENDEE at any time convenient to them.

The VENDOR undertakes to perform, fulfill and comply with the representations, warranties and
undertaking stated in the Deed of Conditional Sale. Should the VENDOR fail to do so, this agreement shall
become null and void and the VENDEE shall be entitled to enforce its right under Section 8 of the Deed of
50
Conditional Sale.

Second. The respondent GDCIA relied on the representations of the petitioners. However, the respondent received
claims for ownership of portions of the property from tenants of the building, including respondent Pealoza,
which impelled it to retain P1,000,000 of the purchase price to answer for said claims. There is, thus, no factual
and legal basis for the plea of the petitioners that the trial court and the CA erred in not rendering judgment in
their favor declaring the said deeds rescinded.
On the claim of respondent Pealoza against the petitioners and her co-respondent GDCIA, we agree with the
latter that the same is barred by the resolution of this Court in G.R. No. 136876, denying due course to her petition
for review of the decision of the CA on the ground that no reversible error was committed by the said court, which
resolution has become final and executory.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed decision and resolution of the Court of
Appeals are AFFIRMED. Costs against the petitioners.
SO ORDERED.
*

**

Puno, Austria-Martinez , Tinga, and Chico-Nazario , JJ., concur.

G.R. No. 111238 January 25, 1995

ADELFA
PROPERTIES,
vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD JIMENEZ, respondents.

INC., petitioner,

REGALADO, J.:
The main issues presented for resolution in this petition for review on certiorari of the judgment of respondent
1
Court of appeals, dated April 6, 1993, in CA-G.R. CV No. 34767 are (1) whether of not the "Exclusive Option to
Purchase" executed between petitioner Adelfa Properties, Inc. and private respondents Rosario JimenezCastaeda and Salud Jimenez is an option contract; and (2) whether or not there was a valid suspension of
payment of the purchase price by said petitioner, and the legal effects thereof on the contractual relations of the
parties.
The records disclose the following antecedent facts which culminated in the present appellate review, to wit:
1. Herein private respondents and their brothers, Jose and Dominador Jimenez, were the registered co-owners of a
parcel of land consisting of 17,710 square meters, covered by Transfer Certificate of Title (TCT) No.
2
309773, situated in Barrio Culasi, Las Pias, Metro Manila.
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 thereof, to herein petitioner pursuant to a "Kasulatan sa Bilihan ng
3
4
Lupa." Subsequently, a "Confirmatory Extrajudicial Partition Agreement" was executed by the Jimenezes,
wherein the eastern portion of the subject lot, with an area of 8,855 square meters was adjudicated to Jose and
Dominador Jimenez, while the western portion was allocated to herein private respondents.

3. Thereafter, herein petitioner expressed interest in buying the western portion of the property from private
5
respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" was executed between
petitioner and private respondents, under the following terms and conditions:
1. The selling price of said 8,655 square meters of the subject property is TWO MILLION EIGHT
HUNDRED FIFTY SIX THOUSAND ONE HUNDRED FIFTY PESOS ONLY (P2,856,150.00)
2. The sum of P50,000.00 which we received from ADELFA PROPERTIES, INC. as an option money
shall be credited as partial payment upon the consummation of the sale and the 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;
3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said balance in accordance
with paragraph 2 hereof, this option shall be cancelled and 50% of the option money to be
forfeited in our favor and we will refund the remaining 50% of said money upon the sale of said
property to a third party;
4. All expenses including the corresponding capital gains tax, cost of documentary stamps are for
the account of the VENDORS, and expenses for the registration of the deed of sale in the Registry
of Deeds are for the account of ADELFA PROPERTIES, INC.
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 a new owner's copy of said certificate of title was filed in court through
Atty. Bayani L. Bernardo, who acted as private respondents' counsel. Eventually, a new owner's copy of the
certificate of title was issued but it remained in the possession of Atty. Bernardo until he turned it over to
petitioner Adelfa Properties, Inc.
6

4. Before petitioner could make payment, it received summons on November 29, 1989, together with a copy of a
complaint filed by the nephews and nieces of private respondents against the latter, Jose and Dominador Jimenez,
and herein petitioner in the Regional Trial Court of Makati, docketed as Civil Case No. 89-5541, for annulment of
the deed of sale in favor of Household Corporation and recovery of ownership of the property covered by TCT No.
7
309773.
5. As a consequence, in a letter dated November 29, 1989, petitioner informed private respondents that it would
hold payment of the full purchase price and suggested that private respondents settle the case with their nephews
and nieces, adding that ". . . if possible, although November 30, 1989 is a holiday, we will be waiting for you and
8
said plaintiffs at our office up to 7:00 p.m." Another letter of the same tenor and of even date was sent by
9
petitioner to Jose and Dominador Jimenez. Respondent Salud Jimenez refused to heed the suggestion of
petitioner and attributed the suspension of payment of the purchase price to "lack of word of honor."
6. On December 7, 1989, petitioner caused to be annotated on the title of the 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,
respectively.
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 to pay the purchase price provided that P500,000.00 be deducted therefrom for the settlement of the civil
case. This was rejected by private respondents. On December 22, 1989, Atty. Bernardo wrote private respondents
on the same matter but this time reducing the amount from P500,000.00 to P300,000.00, and this was also
rejected by the latter.

8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil Case No. 89-5541. Thus, on February 28,
1990, petitioner caused to be annotated anew on TCT No. 309773 the exclusive option to purchase as Entry No.
4442-4.
10

9. On the same day, February 28, 1990, private respondents executed a Deed of Conditional Sale in favor of
Emylene Chua over the same parcel of land for P3,029,250, of which P1,500,000.00 was paid to private
respondents on said date, with the balance to be paid upon the transfer of title to the specified one-half portion.
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 was willing to pay the purchase price, and he requested that the
11
corresponding deed of absolute sale be executed. This was ignored by private respondents.
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 percent of the option money paid under the exclusive option to
purchase. Private respondents then requested petitioner to return the owner's duplicate copy of the certificate of
12
title of respondent Salud Jimenez. Petitioner failed 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 annulment of
contract with damages, praying, among others, that the exclusive option to purchase be declared null and void;
that defendant, 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 cancelled. Emylene Chua, the subsequent purchaser of
the lot, filed a complaint in intervention.
13

12. The trial court rendered judgment therein on September 5, 1991 holding that the agreement entered into by
the parties was merely an option contract, and declaring that the suspension of payment by herein petitioner
constituted a counter-offer which, therefore, was tantamount to a rejection of the option. It likewise ruled that
herein petitioner could not validly suspend 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 eastern portion thereof which was the subject of the sale
between petitioner and the brothers Jose and Dominador Jimenez. The trial court then directed the cancellation of
the exclusive option to purchase, declared the sale to intervenor Emylene Chua as valid and binding, and ordered
petitioner to pay damages and attorney's fees to private respondents, with costs.
13. On appeal, respondent Court of appeals affirmed in toto the decision of the court a quo and held that the
failure of petitioner to pay the purchase price within the period agreed upon was tantamount to an election by
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 a rejection of the option; and that Article 1590 of the Civil Code on
suspension of payments applies only to a contract of sale or a contract to sell, but not to an option contract which
it opined was the nature of the document subject of the case at bar. Said appellate court similarly upheld the
validity of the deed of conditional sale executed by private respondents in favor of intervenor Emylene Chua.
In the present petition, the following assignment of errors are raised:
1. Respondent court of appeals acted with grave abuse of discretion in making its finding that the agreement
entered into by petitioner and private respondents was strictly an option contract;
2. Granting arguendo that the agreement was an option contract, respondent court of Appeals acted with grave
abuse of discretion in grievously failing to consider that while the option period had not lapsed, private
respondents could not unilaterally and prematurely terminate the option period;
3. Respondent Court of Appeals acted with grave abuse of discretion in failing to appreciate fully the attendant
facts and circumstances when it made the conclusion of law that Article 1590 does not apply; and

4. Respondent Court of Appeals acted with grave abuse of discretion in conforming with the sale in favor of
appellee Ma. Emylene Chua and the award of damages and attorney's fees which are not only excessive, but also
14
without in fact and in law.
An analysis of the facts obtaining in this case, as well as the evidence presented by the parties, irresistibly leads to
the conclusion that the agreement between the parties is a contract to sell, and not an option contract or a
contract of sale.
I
1. In view of the extended disquisition thereon by respondent court, it would be worthwhile at this juncture to
briefly discourse on the rationale behind our treatment of the alleged option contract as a contract to sell, rather
than a 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; whereas in a contract to sell, by agreement the ownership is reserved
in the vendor and is not to pass until the full payment of the price. In a contract of sale, the vendor has lost and
cannot recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title
is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition
and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from
becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation in the
deed that title to the property sold is reserved in the seller until the full payment of the price, nor one giving the
15
vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.
There are two features which convince us that the parties never intended to transfer ownership to petitioner
except upon the full payment of the purchase price. Firstly, the exclusive option to purchase, although it provided
for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does
not mention that petitioner is obliged to return possession or ownership of the property as a consequence of nonpayment. There is no stipulation anent reversion or reconveyance of the property to herein private respondents in
the event that petitioner does not comply with its obligation. With the absence of such a stipulation, although
there is a provision on the remedies available to the parties in case of breach, it may legally be inferred that the
parties never intended to transfer ownership to the petitioner to completion of payment of the purchase price.
In effect, there was an implied agreement that ownership shall not pass to the purchaser until he had fully paid the
price. Article 1478 of the civil code does not require that such a stipulation be expressly made. Consequently, an
implied stipulation to that effect is considered valid and, therefore, binding and enforceable between the parties.
It should be noted that under the law and jurisprudence, a contract which contains this kind of stipulation is
considered a contract to sell.
Moreover, that the parties really intended to execute a contract to sell, and not a contract of sale, is bolstered by
the fact that the deed of absolute sale would have been issued only upon the payment of the balance of the
16
purchase price, as may be gleaned from petitioner's letter dated April 16, 1990 wherein it informed private
respondents that it "is now ready and willing to pay you simultaneously with the execution of the corresponding
deed of absolute sale."
Secondly, it has not been shown there was delivery of the property, actual or constructive, made to herein
petitioner. The exclusive option to purchase is not contained in a public instrument the execution of which would
17
have been considered equivalent to delivery. Neither did petitioner take actual, physical possession of the
property at any given time. It is true that after the reconstitution of private respondents' certificate of title, it
remained in the possession of petitioner's counsel, Atty. Bayani L. Bernardo, who thereafter delivered the same to
herein petitioner. Normally, under the law, such possession by the vendee is to be understood as a
18
delivery. However, private respondents explained that there was really no intention on their part to deliver the
title to herein petitioner with the purpose of transferring ownership to it. They claim that Atty. Bernardo had
possession of the title only because he was their counsel in the petition for reconstitution. We have no reason not

to believe this explanation of private respondents, aside from the fact that such contention was never refuted or
contradicted by petitioner.
2. Irrefragably, the controverted document should legally be considered as a perfected contract to sell. On this
particular point, therefore, we reject the position and ratiocination of respondent Court of Appeals which, while
awarding the correct relief to private respondents, categorized the instrument as "strictly an option contract."
The important task in contract interpretation is always the ascertainment of the intention of the contracting
parties and that task is, of course, to be discharged by looking to the words they used to project that intention in
their contract, all the words not just a particular word or two, and words in context not words standing
19
alone. Moreover, judging from the subsequent acts of the parties which will hereinafter be discussed, it is
20
undeniable that the intention of the parties was to enter into a contract to sell. In addition, the title of a contract
21
does not necessarily determine its true nature. Hence, the fact that the document under discussion is entitled
"Exclusive Option to Purchase" is not controlling where the text thereof shows that it is a contract to sell.
An option, as used in the law on sales, is a continuing offer or contract by which the owner stipulates with another
that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in
compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or
demand a sale. It is also sometimes called an "unaccepted offer." An option is not of itself a purchase, but merely
22
secures the privilege to buy. It is not a sale of property but a sale of property but a sale of the right to
23
purchase. It is simply a contract by which the owner of property agrees with another person that he shall have
the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not then agree
to sell it; but he does sell something, that it is, the right or privilege to buy at the election or option of the other
24
party. Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option,
aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not
vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a
contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying
25
the property on certain terms.
On the other hand, a contract, like a contract to sell, involves a meeting of minds two persons whereby one binds
26
himself, with respect to the other, to give something or to render some service. Contracts, in general, are
27
perfected by mere consent, which is manifested by the meeting of the offer and the acceptance upon the thing
28
and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute.
The distinction between an "option" and a contract of sale is that an option is an unaccepted offer. It states the
terms and conditions on which the owner is willing to sell the land, if the holder elects to accept them within the
time limited. If the holder does so elect, he must give notice to the other party, and the accepted offer thereupon
becomes a valid and binding contract. If an acceptance is not made within the time fixed, the owner is no longer
bound 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 its execution. The offer and the acceptance are concurrent,
29
since the minds of the contracting parties meet in the terms of the agreement.
A perusal of the contract in this case, as well as the oral and documentary evidence presented by the parties,
readily shows that there is indeed a concurrence of petitioner's offer to buy and private respondents' acceptance
thereof. The rule is that except where a formal acceptance is so required, although the acceptance must be
affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it
may be 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 intention or determination to accept the offer to buy or sell. Thus,
acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of
30
sale.

The records also show that private respondents accepted the offer of petitioner to buy their property under the
terms of their contract. At the time petitioner made its offer, private respondents suggested that their transfer
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 private respondents in filing a petition for reconstitution. After the title was
reconstituted, the parties agreed that petitioner would pay either in cash or manager's check the amount of
P2,856,150.00 for the lot. Petitioner was supposed to pay the same on November 25, 1989, but it later offered to
make a down payment of P50,000.00, with the balance of P2,806,150.00 to be paid on or before November 30,
31
1989. Private respondents agreed to the counter-offer made by petitioner. As a result, the so-called exclusive
option to purchase was prepared by petitioner and was subsequently signed by private respondents, thereby
creating a perfected contract to sell between them.
It cannot be gainsaid that the offer to buy a specific piece of land was definite and certain, while the acceptance
thereof was absolute and without any condition or qualification. The agreement as to the object, the price of the
property, and the terms of payment was clear and well-defined. No other 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
requirements of the law by stipulating that "all expenses including the corresponding capital gains tax, cost of
documentary stamps are for the account of the vendors, and expenses for the registration of the deed of sale in
the Registry of Deeds are for the account of Adelfa properties, Inc." Hence, there was nothing left to be done
except the performance of the respective obligations of the parties.
We do not subscribe to private respondents' submission, which was upheld by both the trial court and respondent
court of appeals, that the offer of 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 counter-offer. It must be stressed that
there already existed a perfected contract between the parties at the time the alleged counter-offer was made.
Thus, any new offer by a party becomes binding only when it is accepted by the other. In the case of private
respondents, they actually refused to concur in said offer of petitioner, by reason of which the original terms of the
contract continued to be enforceable.
At any rate, the same cannot be considered a counter-offer for the simple reason that petitioner's sole purpose
was to settle the civil case in order that it could already comply with its obligation. In fact, it was even indicative of
a 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 believed in good faith, rendered compliance improbable at that time. In
addition, no inference can be drawn from that suggestion given by petitioner that it was totally abandoning the
original contract.
More importantly, it will be noted that the failure of petitioner to pay the balance of the purchase price within the
agreed period was attributed by private respondents to "lack of word of honor" on the part of the former. The
reason of "lack of word of honor" is to us a clear indication that private respondents considered petitioner already
bound by its obligation to pay the balance of the consideration. In effect, private respondents were demanding or
exacting fulfillment of the obligation from herein petitioner. with the arrival of the period agreed upon by the
parties, petitioner was supposed to comply with the obligation incumbent upon it to perform, not merely to
exercise an option or a right to buy the property.
The obligation of petitioner on November 30, 1993 consisted of an obligation to give something, that is, the
payment of the purchase price. The contract did not simply give petitioner the discretion to pay for the
32
property. It will be noted that there is nothing in the said contract to show that petitioner was merely given a
certain period within which to exercise its privilege to buy. The agreed period was intended to give time to herein
petitioner within which to 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 otherwise.
The test in determining whether a contract is a "contract of sale or purchase" or a mere "option" is whether or not
33
the agreement could be specifically enforced. There is no doubt that the obligation of petitioner to pay the

purchase price is specific, definite and certain, and consequently binding and enforceable. Had private respondents
chosen to enforce the contract, they could have specifically compelled petitioner to pay the balance of
P2,806,150.00. This is distinctly made manifest in the contract itself as an integral stipulation, compliance with
which could legally and definitely be demanded from petitioner as a consequence.
This is not a case where no right is as yet created nor an obligation declared, as where something further remains
34
to be done before the buyer and seller obligate themselves. An agreement is only an "option" when no
obligation rests on the party to make any payment except such as may be agreed on between the parties as
35
consideration to support the option until he has made up his mind within the time specified. An option, and not
a contract to purchase, is effected by an agreement to sell real estate for payments to be made within specified
time and providing forfeiture of money paid upon failure to make payment, where the purchaser does not agree to
36
purchase, to make payment, or to bind himself in any way other than the forfeiture of the payments made. As
hereinbefore discussed, this is not the situation obtaining in the case at bar.
While there is jurisprudence to the effect that a contract which provides that the initial payment shall be totally
37
forfeited in case of default in payment is to be considered as an option contract, still we are not inclined to
conform with the findings of respondent court and the court a quo that the contract executed between the parties
is an option contract, for the reason that the parties were already contemplating the payment of the balance of the
purchase price, and were not merely quoting an agreed value for the property. The term "balance," connotes a
remainder or something remaining from the original total sum already agreed upon.
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 P50,000.00 was not distinct from the cause or consideration for the sale
of the property, but was itself a part thereof. It is a statutory rule that whenever earnest money is given in a
38
contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. It
constitutes an advance payment and must, therefore, be deducted from the total price. Also, earnest money is
given by the buyer to the seller to bind the bargain.
There are clear distinctions between earnest money and option money, viz.: (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 money is given only where there is already a sale, while option money applies to a sale not yet perfected;
and (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives
39
option money, he is not required to buy.
The aforequoted characteristics of earnest money are apparent in the so-called option contract under review, even
though it was called "option money" by the parties. In addition, private respondents failed to show that the
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 contrary, it has been sufficiently established that such payment was but an
40
element of the performance of petitioner's obligation under the contract to sell.
II
1. This brings us to the second issue as to whether or not there was valid suspension of payment of the purchase
price by petitioner and the legal consequences thereof. To justify its failure to pay the purchase price within the
agreed period, petitioner invokes Article 1590 of the civil Code which provides:
Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired,
or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a
foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused
the disturbance or danger to cease, unless the latter gives security for the return of the price in a
proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee

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

resumed after it received notice of such dismissal. Unfortunately, petitioner failed to seasonably make payment, as
in fact it has deposit the money with the trial court when this case was originally filed therein.
By reason of petitioner's failure to comply with its obligation, private respondents elected to resort to and did
announce the rescission of the contract through its letter to petitioner dated July 27, 1990. That written notice of
rescission is deemed sufficient under the circumstances. Article 1592 of the Civil Code which requires rescission
48
either by judicial action or notarial act is not applicable to a contract to sell. Furthermore, judicial action for
rescission of a contract is not necessary where the contract provides for automatic rescission in case of
49
breach, as in the contract involved in the present controversy.
50

We are not unaware of the ruling in University of the Philippines vs. De los Angeles, etc. that the right to rescind
is not absolute, being ever subject to scrutiny and review by the proper court. It is our considered view, however,
that this rule applies to a situation where the extrajudicial rescission is contested by the defaulting party. In other
words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in court. If the
51
debtor impugns the declaration, it shall be subject to judicial determination otherwise, if said party does not
52
oppose it, the extrajudicial rescission shall have legal effect.
In the case at bar, it has been shown that although petitioner was duly furnished and did receive a written notice
of rescission which specified the grounds therefore, it failed to reply thereto or protest against it. Its silence
53
thereon suggests an admission of the veracity and validity of private respondents' claim. Furthermore, the
initiative of instituting suit was transferred from the rescinder to the defaulter by virtue of the automatic rescission
54
clause in the contract. But then, the records bear out the fact that aside from the lackadaisical manner with
which petitioner treated private respondents' latter of cancellation, it utterly failed to seriously seek redress from
the court for the enforcement of its alleged rights under the contract. If private respondents had not taken the
initiative of filing Civil Case No. 7532, evidently petitioner had no intention to take any legal action to compel
specific performance from the former. By such cavalier disregard, it has been effectively estopped from seeking
the affirmative relief it now desires but which it had theretofore disdained.
WHEREFORE, on the foregoing modificatory premises, and considering that the same result has been reached by
respondent Court of Appeals with respect to the relief awarded to private respondents by the court a quowhich
we find to be correct, its assailed judgment in CA-G.R. CV No. 34767 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Puno and Mendoza, JJ., concur.

G.R. No. L-63745 June 8, 1990

RODOLFO
ALFONSO
and
NORMA
G.
vs.
COURT OF APPEALS, ROBERTO CHANCO and MYRNA GARCIA CHANCO, respondents.

ALFONSO, petitioners,

Reynold S. Fajardo, Marcial P. Lagunzad, Jr., Jose V. Juan, Mercedes M. Respicio I, Arceli Adan Rubin for petitioners.
Rustico F. Delos Reyes, Jr., for respondents.

NARVASA, J.:
Mr. and Mrs. Roberto Chanco were the registered owners of a 239-square-meter lot in Barrio Sto. Angel, Sta. Cruz,
Laguna. They entered into an oral agreement with Mr. and Mrs. Rodolfo Alfonso regarding the lot. But as will
shortly be seen, they evidently had different notions of the precise terms of the agreement. What is undisputed is
that the Alfonsos paid P2,000.00 to the Chancos, and that on that occasion the latter executed a private
instrument of the following tenor:
August 21/73
Sa kinauukulan,
1. Ako si Roberto Chanco at Myrna Chanco ay tumanggap ng halagang (dalawang libong piso)
P2,000.00 sa mag-asawang Rodolfo Alfonso at Norma Alfonso.
Bilang paunang bayad sa aking lote sa Monserrat Subdivision na kinatitirikan ng kanilang bahay.
Sa katunayan ay pinirmahan sa ibaba nito.
(S) ROBERTO CHANCO

(S) MYRNA G. CHANCO

ROBERTO CHANCO

MRYNA G. CHANCO.

It is the Alfonso's claim that. their understanding with the Chancos was that they would pay to them the sum of
P4,000.00, the balance of the consideration for the transfer of the land to them, as soon as they obtained a loan
from the Philippine National Bank; that they had in fact gotten such a loan and then, on or about October 6,1973,
offered to pay to the Chancos that sum of P4,000.00, but the Chancos had unjustifiably refused to accept the
preferred payment and had instead sold the property to the Namit Spouses, despite the Alfonsos' protest made
not only to the Chances but also to the Namits.
It is the Chancos' claim, on the other hand, that they were selling their property because they were in urgent need
of money at the time; that they could thus give the Alfonsos only one week within which to pay the balance; that
when the Alfonsos failed to do so, the Chancos told them they were cancelling their agreement and sale the
property to someone else, and tried to return the P2,000.00 they had earlier received; that the Alfonsos refused to
accept the P2,000.00 and instead, tendered payment of an additional sum of P2,500.00 which the Chancos, in turn,
rejected; and that the Chancos then executed a deed of sale, conveying the land to the spouses, Serafin Namit and
Clarita Alvarez, for P6,000.00, and on the strength thereof, a new certificate of title over the land was issued to the
Namits.
The Alfonso Spouses brought suit in the Court First Instance of Laguna against the Chancos and the Namits to
annul, the sale and compel reconveyance to them of the land in question. Their complaint was founded on the
theory that their contract with the Chancos was one of absolute sale which could not be unilaterally cancelled but
required for its rescission demand therefor, judicially or by notarial act, conformably with Article 1592 of the Civil
Code reading as follows:,
ART. 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of right
take place, the vendee may pay, even after the expiration of the period, as long as no demand
for rescission of the contract has been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term.

Since the Alfonsos argue, no such demand fro rescission their contract had been made by the Chancos, either
judicially or by notarial act, their tender of the balance on October 6, 1973 was timely and should have been
accepted by the Chancos; and the Chanco's repudation of the sale and their second sale of the same property, this
time to the Namits who had full knowledge of the first transaction-were illegal and void, and rendered the Chancos
and Namits liable in damages.
1

After due proceedings the Trial Court rendered judgment, disposing as follows:
(1) defendants Serafin and Clarita Namit to reconvey the lot covered by transfer Certificate of
title No. T-73821 of the Registry of Deeds for the Province of Laguna to plaintiff spouses Rodolfo
and Norma G. Alfonso for P6,000.00 upon the payment by the latter of P4,000.00, the difference
of P2,000.00 to be paid to the Namits by the Chancos, such amonut having been previously
recieved by the latter from the Alfonsos, and
(2) all defendants jointly and severally to pay the plaintiffs the amount of P200.00 as actual
damages, plus costs.
The Trial Court's judgment was however reversed by the Court of Appeals. The dispositive portion of the latter's
3
4
judgment, promulgated on November 8, 1982, read as follows:
WHEREFORE, the judgment appealed from is hereby reversed and another one rendered
ordering dismissal of the plaintiffs' complaint and upholding the validity of the sale of the lot in
question made by the defendants Chancos in favor of the defendant Namit spouses, as well as
the Transfer Certificate of Title No. T-73821 issued in the names of Serafin Namit and Clarita
Alvarez. The plaintiffs are to be reimbursed the sum of P2,000.00 which they gave as down
payment for the lot but they are to pay the defendants attorney's fees in the sum of P2,000.00.
In view of their relationship the parties shall bear their own costs.
The Appellate, Court found that the evidence satisfactorily established (1) that time was indeed of the essence in
the Chancos' agreement with the Alfonsos, the Chancos being then in urgent need of money and hence, transfer
the property only after full payment of the balance of the price in the sum of P4,000.00; (2) that no deed of
absolute sale in favor of the Alfonsos was drawn up at the time (or any time, thereafter, for that matter) the only
writing executed being a receipt subscribed by the Chancos simply acknowledging acceptance of P2,000.00 from
the Alfonsos as advance payment for their, (the Chancos') lot at the Monserrat Subdivision, and (3) that actually,
the Alfonsos were not in a position to pay the full amount of the purchase price. On these factual premises the
Court adjudged it to be "conformable with law and equity, and more in consonance with justice," to uphold the
extrajudicial cancellation made by the Chancos of their agreement with the Alfonsos, as well as the subsequent
sale of the lot to the Namit Spouses.
From this judgment the Alfonsos have appealed to this Court, praying for reversal thereof. Their plea must be
denied.
The rule, of course, is that this Court is bound by the conclusions of fact of the Court of Appeals, subject to certain
well defined exceptions none of which exists here. Now, the facts declared by the Court of Appeals to have been
satisfactorily proven do not demonstrate the existence of a contract of sale of the immovable in question but
rather, a contract to sell it; hence the legal provision invoked by the Alfonsos, Article 1592 of the Civil Code, supra,
cannot apply.
The issue raised by the Alfonsos is. not new. This Court has already had occasion, more than once, to pass upon
that precise issue and resolve it adversely to the Alfonsos' position.

Manuel v. Rodriguez, 109 Phil. 1, was one such occasion. In Manuel, "only the price and the terns of payment were
in writing," but the most important matter in the controversy, the alleged transfer of title was never "reduced to
any written document. It was held that the contract should not be considered as a written but an oral one; not a
sale but a promise to sell; and that "the absence of a formal deed of conveyance" was a strong indication "that the
parties did not intend immediate transfer of title, but only a transfer after fun payment of the price." Under these
circumstances, the Court ruled Article 1504 of the Civil Code of 1889 (Art. 1592 of the present Code) to be
inapplicable to the contract in controversy-a contract to sell or promise to sell-"where title remains with the
5
vendor until fulfillment of a positive suspensive condition, such as full payment of the price ...
And in Roque v. Lapuz, 96 SCRA 741, the Court reiterated the doctrine, affirmed by the "overwhelming weight of
6
authority culminating in the Luzon Brokerage v. Maritime cases, ... that Article, 1592 of the New Civil Code does
not apply to a contract to sell where title remains with the vendor until full payment of the price as in the case at
bar."
WHEREFORE, the petition is DENIED and the judgment of the Court of Appeals subject thereof is AFFIRMED, with
costs against petitioners.
SO ORDERED.
Cruz, Gancayco and Medialdea, JJ., concur.
Grio-Aquino, J., is on leave.

G.R. No. 179965

February 20, 2013

NICOLAS
P.
vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.

DIEGO, Petitioner,

DECISION
DEL CASTILLO, J.:
It is settled jurisprudence, to the point of being elementary, that an agreement which stipulates that the seller
shall execute a deed of sale only upon or after tl1ll payment of the purchase price is a contract to sell, not a
1
contract of sale. In Reyes v. Tuparan, this Court declared in categorical terms that "[w]here the vendor promises
to execute a deed of absolute sale upon the completion by the vendee of the payment of the price, the contract
is only a contract to sell. The aforecited stipulation shows that the vendors reserved title to the subject property
until full payment of the purchase price."
In this case, it is not disputed as in tact both parties agreed that the deed of sale shall only be executed upon
payment of the remaining balance of the purchase price. Thus, pursuant to the above stated jurisprudence, we
similarly declare that the transaction entered into by the parties is a contract to sell.
2

Before us is a Petition for Review on Certiorari questioning the June 29, 2007 Decision and the October 3, 2007
4
5
Resolution of the Court of Appeals (CA) in CA-G.R. CV No. 86512, which affirmed the April 19, 2005 Decision of
the Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case No. 99-02971-D.

Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo, respondent herein, entered into an oral
contract to sell covering Nicolass share, fixed at P500,000.00, as co-owner of the familys Diego Building situated
in Dagupan City. Rodolfo made a downpayment of P250,000.00. It was agreed that the deed of sale shall be
executed upon payment of the remaining balance of P250,000.00. However, Rodolfo failed to pay the remaining
balance.
Meanwhile, the building was leased out to third parties, but Nicolass share in the rents were not remitted to him
by herein respondent Eduardo, another brother of Nicolas and designated administrator of the Diego Building.
Instead, Eduardo gave Nicolass monthly share in the rents to Rodolfo. Despite demands and protestations by
Nicolas, Rodolfo and Eduardo failed to render an accounting and remit his share in the rents and fruits of the
building, and Eduardo continued to hand them over to Rodolfo.
6

Thus, on May 17, 1999, Nicolas filed a Complaint against Rodolfo and Eduardo before the RTC of Dagupan City and
docketed as Civil Case No. 99-02971-D. Nicolas prayed that Eduardo be ordered to render an accounting of all the
transactions over the Diego Building; that Eduardo and Rodolfo be ordered to deliver to Nicolas his share in the
rents; and that Eduardo and Rodolfo be held solidarily liable for attorneys fees and litigation expenses.
7

Rodolfo and Eduardo filed their Answer with Counterclaim for damages and attorneys fees. They argued that
Nicolas had no more claim in the rents in the Diego Building since he had already sold his share to Rodolfo. Rodolfo
admitted having remitted only P250,000.00 to Nicolas. He asserted that he would pay the balance of the purchase
price to Nicolas only after the latter shall have executed a deed of absolute sale.
Ruling of the Regional Trial Court
8

After trial on the merits, or on April 19, 2005, the trial court rendered its Decision dismissing Civil Case No. 9902971-D for lack of merit and ordering Nicolas to execute a deed of absolute sale in favor of Rodolfo upon
payment by the latter of the P250,000.00 balance of the agreed purchase price. It made the following interesting
pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego Building, x x x. As a co-owner, he is
entitled to [his] share in the rentals of the said building. However, plaintiff [had] already sold his share to
defendant Rodolfo Diego in the amount of P500,000.00 and in fact, [had] already received a partial payment in the
purchase price in the amount of P250,000.00. Defendant Eduardo Diego testified that as per agreement, verbal,
of the plaintiff and defendant Rodolfo Diego, the remaining balance of P250,000.00 will be paid upon the
execution of the Deed of Absolute Sale. It was in the year 1997 when plaintiff was being required by defendant
Eduardo Diego to sign the Deed of Absolute Sale. Clearly, defendant Rodolfo Diego was not yet in default as the
plaintiff claims which cause [sic] him to refuse to sign [sic] document. The contract of sale was already perfected as
early as the year 1993 when plaintiff received the partial payment, hence, he cannot unilaterally revoke or rescind
the same. From then on, plaintiff has, therefore, ceased to be a co-owner of the building and is no longer entitled
to the fruits of the Diego Building.
Equity and fairness dictate that defendant [sic] has to execute the necessary document regarding the sale of his
share to defendant Rodolfo Diego. Correspondingly, defendant Rodolfo Diego has to perform his obligation as per
9
their verbal agreement by paying the remaining balance of P250,000.00.
To summarize, the trial court ruled that as early as 1993, Nicolas was no longer entitled to the fruits of his aliquot
share in the Diego Building because he had "ceased to be a co-owner" thereof. The trial court held that when
Nicolas received the P250,000.00 downpayment, a "contract of sale" was perfected. Consequently, Nicolas is
obligated to convey such share to Rodolfo, without right of rescission. Finally, the trial court held that

theP250,000.00 balance from Rodolfo will only be due and demandable when Nicolas executes an absolute deed
of sale.
Ruling of the Court of Appeals
Nicolas appealed to the CA which sustained the trial courts Decision in toto. The CA held that since there was a
perfected contract of sale between Nicolas and Rodolfo, the latter may compel the former to execute the proper
sale document. Besides, Nicolass insistence that he has since rescinded their agreement in 1997 proved the
existence of a perfected sale. It added that Nicolas could not validly rescind the contract because: "1) Rodolfo
ha[d] already made a partial payment; 2) Nicolas ha[d] already partially performed his part regarding the contract;
10
and 3) Rodolfo opposes the rescission."
The CA then proceeded to rule that since no period was stipulated within which Rodolfo shall deliver the balance
of the purchase price, it was incumbent upon Nicolas to have filed a civil case to fix the same. But because he failed
to do so, Rodolfo cannot be considered to be in delay or default.
Finally, the CA made another interesting pronouncement, that by virtue of the agreement Nicolas entered into
with Rodolfo, he had already transferred his ownership over the subject property and as a consequence, Rodolfo is
legally entitled to collect the fruits thereof in the form of rentals. Nicolas remaining right is to demand payment of
the balance of the purchase price, provided that he first executes a deed of absolute sale in favor of Rodolfo.
Nicolas moved for reconsideration but the same was denied by the CA in its Resolution dated October 3, 2007.
Hence, this Petition.
Issues
The Petition raises the following errors that must be rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE WAS NO PERFECTED CONTRACT OF
SALE BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT RODOLFO DIEGO OVER NICOLASS SHARE OF THE
BUILDING BECAUSE THE SUSPENSIVE CONDITION HAS NOT YET BEEN FULFILLED.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT OF SALE BETWEEN PETITIONER
AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING AND IS NOT RESCINDED GIVING MISPLACED
RELIANCE ON PETITIONER NICOLAS STATEMENT THAT THE SALE HAS NOT YET BEEN REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER NICOLAS DIEGO ACTED LEGALLY
AND CORRECTLY WHEN HE UNILATERALLY RESCINDED AND REVOKED HIS AGREEMENT OF SALE WITH
RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFOS MATERIAL, SUBSTANTIAL BREACH OF THE CONTRACT.
IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS NO MORE RIGHTS OVER HIS
SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO PERFECTED CONTRACT OF SALE
BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO AND THERE WAS YET NO TRANSFER OF OWNERSHIP
OF PETITIONERS SHARE TO RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE SUSPENSIVE
CONDITION UNDER THE CONTRACT.
V
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT RODOLFO HAS UNJUSTLY
ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE NOT HAVING PAID THE BALANCE OF THE
PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT YET ACQUIRED OWNERSHIP OVER THE SHARE OF
PETITIONER NICOLAS, HE HAS ALREADY BEEN APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL BENEFIT THE
SHARE OF THE INCOME OF THE BUILDING AND THE PORTION OF THE BUILDING ITSELF WHICH WAS DUE TO AND
OWNED BY PETITIONER NICOLAS.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL DAMAGES, ATTORNEYS FEES AND
LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT THAT PETITIONERS RIGHTS HAD BEEN WANTONLY
11
VIOLATED BY THE RESPONDENTS.
Petitioners Arguments
12

13

In his Petition, the Supplement thereon, and Reply, Nicolas argues that, contrary to what the CA found, there
was no perfected contract of sale even though Rodolfo had partially paid the price; that in the absence of the third
element in a sale contract the price there could be no perfected sale; that failing to pay the required price in
full, Nicolas had the right to rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that Rodolfo was not in default or delay in the payment of the
agreed balance for his (Nicolass) failure to file a case to fix the period within which payment of the balance should
be made. He believes that Rodolfos failure to pay within a reasonable time was a substantial and material breach
of the agreement which gave him the right to unilaterally and extrajudicially rescind the agreement and be
discharged of his obligations as seller; and that his repeated written demands upon Rodolfo to pay the balance
granted him such rights.
Nicolas further claims that based on his agreement with Rodolfo, there was to be no transfer of title over his share
in the building until Rodolfo has effected full payment of the purchase price, thus, giving no right to the latter to
collect his share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages, attorneys fees and litigation expenses for what he
believes is a case of unjust enrichment at his expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements, respondents accuse the petitioner of "cheating" them,
claiming that after the latter received the P250,000.00 downpayment, he "vanished like thin air and hibernated in
14
the USA, he being an American citizen," only to come back claiming that the said amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the petitioners arguments below, which are deemed
to have been sufficiently passed upon and debunked by the appellate court.

Our Ruling
The Court finds merit in the Petition.
The contract entered into by Nicolas and Rodolfo was a contract to sell.
a) The stipulation to execute a deed of sale upon full payment of the purchase price is a unique and
distinguishing characteristic of a contract to sell. It also shows that the vendor reserved title to the property
until full payment.
There is no dispute that in 1993, Rodolfo agreed to buy Nicolass share in the Diego Building for the price
ofP500,000.00. There is also no dispute that of the total purchase price, Rodolfo paid, and Nicolas
received,P250,000.00. Significantly, it is also not disputed that the parties agreed that the remaining amount
ofP250,000.00 would be paid after Nicolas shall have executed a deed of sale.
This stipulation, i.e., to execute a deed of absolute sale upon full payment of the purchase price, is a unique and
15
distinguishing characteristic of a contract to sell. In Reyes v. Tuparan, this Court ruled that a stipulation in the
contract, "[w]here the vendor promises to execute a deed of absolute sale upon the completion by the vendee
of the payment of the price," indicates that the parties entered into a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of ownership on the part of the vendor. Explicitly stated, the
Court ruled that the agreement to execute a deed of sale upon full payment of the purchase price"shows that the
16
vendors reserved title to the subject property until full payment of the purchase price."
17

In Tan v. Benolirao, this Court, speaking through Justice Brion, ruled that the parties entered into a contract to
sell as revealed by the following stipulation:
d) That in case, BUYER has complied with the terms and conditions of this contract, then the SELLERS shall execute
18
and deliver to the BUYER the appropriate Deed of Absolute Sale;
The Court further held that "[j]urisprudence has established that where the seller promises to execute a deed of
absolute sale upon the completion by the buyer of the payment of the price, the contract is only a contract to
19
sell."
b) The acknowledgement receipt signed by Nicolas as well as the contemporaneous acts of the parties show that
they agreed on a contract to sell, not of sale. The absence of a formal deed of conveyance is indicative of a
contract to sell.
20

In San Lorenzo Development Corporation v. Court of Appeals, the facts show that spouses Miguel and Pacita Lu
(Lu) sold a certain parcel of land to Pablo Babasanta (Pablo). After several payments, Pablo wrote Lu demanding
21
"the execution of a final deed of sale in his favor so that he could effect full payment of the purchase price." To
prove his allegation that there was a perfected contract of sale between him and Lu, Pablo presented a receipt
22
signed by Lu acknowledging receipt of P50,000.00 as partial payment.
However, when the case reached this Court, it was ruled that the transaction entered into by Pablo and Lu was
only a contract to sell, not a contract of sale. The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos (P50,000.00) from
Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation
that the seller reserves the ownership of the property until full payment of the price which is a distinguishing
feature of a contract to sell, the subsequent acts of the parties convince us that the Spouses Lu never intended to
transfer ownership to Babasanta except upon full payment of the purchase price.

Babasantas letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated requests for
the execution of the final deed of sale in his favor so that he could effect full payment of the price, Pacita Lu
allegedly refused to do so. In effect, Babasanta himself recognized that ownership of the property would not be
transferred to him until such time as he shall have effected full payment of the price. Moreover, had the sellers
intended to transfer title, they could have easily executed the document of sale in its required form
simultaneously with their acceptance of the partial payment, but they did not. Doubtlessly, the receipt signed by
23
Pacita Lu should legally be considered as a perfected contract to sell.
24

In the instant case, records show that Nicolas signed a mere receipt acknowledging partial payment
ofP250,000.00 from Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of Diego Building as partial payment for Nicolas Diego.
(signed)
25
Nicolas Diego
26

As we ruled in San Lorenzo Development Corporation v. Court of Appeals, the parties could have executed a
document of sale upon receipt of the partial payment but they did not. This is thus an indication that Nicolas did
not intend to immediately transfer title over his share but only upon full payment of the purchase price. Having
thus reserved title over the property, the contract entered into by Nicolas is a contract to sell. In addition, Eduardo
27
admitted that he and Rodolfo repeatedly asked Nicolas to sign the deed of sale but the latter refused because he
was not yet paid the full amount. As we have ruled in San Lorenzo Development Corporation v. Court of
28
Appeals, the fact that Eduardo and Rodolfo asked Nicolas to execute a deed of sale is a clear recognition on their
part that the ownership over the property still remains with Nicolas. In fine, the totality of the parties acts
convinces us that Nicolas never intended to transfer the ownership over his share in the Diego Building until the
full payment of the purchase price. Without doubt, the transaction agreed upon by the parties was a contract to
sell, not of sale.
29

In Chua v. Court of Appeals, the parties reached an impasse when the seller wanted to be first paid the
consideration before a new transfer certificate of title (TCT) is issued in the name of the buyer. Contrarily, the
buyer wanted to secure a new TCT in his name before paying the full amount. Their agreement was embodied in a
receipt containing the following terms: "(1) the balance of P10,215,000.00 is payable on or before 15 July 1989; (2)
the capital gains tax is for the account of x x x; and (3) if [the buyer] fails to pay the balance x x x the [seller] has the
30
right to forfeit the earnest money x x x." The case eventually reached this Court. In resolving the impasse, the
Court, speaking through Justice Carpio, held that "[a] perusal of the Receipt shows that the true agreement
31
between the parties was a contract to sell." The Court noted that "the agreement x x x was embodied in a receipt
32
rather than in a deed of sale, ownership not having passed between them." The Court thus concluded that "[t]he
absence of a formal deed of conveyance is a strong indication that the parties did not intend immediate transfer
33
of ownership, but only a transfer after full payment of the purchase price." Thus, the "true agreement between
34
the parties was a contract to sell."
In the instant case, the parties were similarly embroiled in an impasse. The parties agreement was likewise
embodied only in a receipt. Also, Nicolas did not want to sign the deed of sale unless he is fully paid. On the other
hand, Rodolfo did not want to pay unless a deed of sale is duly executed in his favor. We thus say, pursuant to our
35
ruling in Chua v. Court of Appeals that the agreement between Nicolas and Rodolfo is a contract to sell.
This Court cannot subscribe to the appellate courts view that Nicolas should first execute a deed of absolute sale
in favor of Rodolfo, before the latter can be compelled to pay the balance of the price. This is patently ridiculous,
and goes against every rule in the book. This pronouncement virtually places the prospective seller in a contract to

sell at the mercy of the prospective buyer, and sustaining this point of view would place all contracts to sell in
jeopardy of being rendered ineffective by the act of the prospective buyers, who naturally would demand that the
deeds of absolute sale be first executed before they pay the balance of the price. Surely, no prospective seller
would accommodate.
In fine, "the need to execute a deed of absolute sale upon completion of payment of the price generally
indicates that it is a contract to sell, as it implies the reservation of title in the vendor until the vendee has
36
completed the payment of the price." In addition, "[a] stipulation reserving ownership in the vendor until full
37
payment of the price is x x x typical in a contract to sell." Thus, contrary to the pronouncements of the trial and
appellate courts, the parties to this case only entered into a contract to sell; as such title cannot legally pass to
Rodolfo until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to Rodolfo.
Moreover, there could not even be a surrender or delivery of title or possession to the prospective buyer Rodolfo.
This was made clear by the nature of the agreement, by Nicolass repeated demands for the return of all rents
unlawfully and unjustly remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardos repeated demands for
Nicolas to execute a deed of sale which, as we said before, is a recognition on their part that ownership over the
subject property still remains with Nicolas.
Significantly, when Eduardo testified, he claimed to be knowledgeable about the terms and conditions of the
transaction between Nicolas and Rodolfo. However, aside from stating that out of the total consideration
ofP500,000.00, the amount of P250,000.00 had already been paid while the remaining P250,000.00 would be paid
after the execution of the Deed of Sale, he never testified that there was a stipulation as regards delivery of title or
38
possession.
It is also quite understandable why Nicolas belatedly demanded the payment of the rentals. Records show that the
structural integrity of the Diego Building was severely compromised when an earthquake struck Dagupan City in
39
40
1990. In order to rehabilitate the building, the co-owners obtained a loan from a bank. Starting May 1994, the
41
property was leased to third parties and the rentals received were used to pay off the loan. It was only in 1996,
42
or after payment of the loan that the co-owners started receiving their share in the rentals. During this time,
Nicolas was in the USA but immediately upon his return, he demanded for the payment of his share in the rentals
which Eduardo remitted to Rodolfo. Failing which, he filed the instant Complaint. To us, this bolsters our findings
that Nicolas did not intend to immediately transfer title over the property.
It must be stressed that it is anathema in a contract to sell that the prospective seller should deliver title to the
property to the prospective buyer pending the latters payment of the price in full. It certainly is absurd to assume
that in the absence of stipulation, a buyer under a contract to sell is granted ownership of the property even when
he has not paid the seller in full. If this were the case, then prospective sellers in a contract to sell would in all
likelihood not be paid the balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is one where the prospective seller reserves the
transfer of title to the prospective buyer until the happening of an event, such as full payment of the purchase
price. What the seller obliges himself to do is to sell the subject property only when the entire amount of the
purchase price has already been delivered to him. In other words, the full payment of the purchase price partakes
of a suspensive condition, the nonfulfillment of which prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller without further remedies by the prospective buyer. It does not, by
43
itself, transfer ownership to the buyer."
The contract to sell is terminated or cancelled.

Having established that the transaction was a contract to sell, what happens now to the parties agreement?
44

45

The remedy of rescission is not available in contracts to sell. As explained in Spouses Santos v. Court of Appeals:

In view of our finding in the present case that the agreement between the parties is a contract to sell, it follows
that the appellate court erred when it decreed that a judicial rescission of said agreement was necessary. This is
because there was no rescission to speak of in the first place. As we earlier pointed out, in a contract to sell, title
remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a
contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to pay the price
agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force. This is entirely different from the situation in a contract of sale,
where non-payment of the price is a negative resolutory condition. The effects in law are not identical. In a
contract of sale, the vendor has lost ownership of the thing sold and cannot recover it, unless the contract of sale is
rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has
not complied fully with the condition of paying the purchase price. If the vendor should eject the vendee for failure
to meet the condition precedent, he is enforcing the contract and not rescinding it. When the petitioners in the
instant case repossessed the disputed house and lot for failure of private respondents to pay the purchase price in
full, they were merely enforcing the contract and not rescinding it. As petitioners correctly point out, the Court of
Appeals erred when it ruled that petitioners should have judicially rescinded the contract pursuant to Articles 1592
and 1191 of the Civil Code. Article 1592 speaks of non-payment of the purchase price as a resolutory condition. It
does not apply to a contract to sell. As to Article 1191, it is subordinated to the provisions of Article 1592 when
46
applied to sales of immovable property. Neither provision is applicable in the present case.
47

Similarly, we held in Chua v. Court of Appeals that "Article 1592 of the Civil Code permits the buyer to pay, even
after the expiration of the period, as long as no demand for rescission of the contract has been made upon him
either judicially or by notarial act. However, Article 1592 does not apply to a contract to sell where the seller
48
reserves the ownership until full payment of the price," as in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay the purchase price, the contract to
49
50
sell was deemed terminated or cancelled. As we have held in Chua v. Court of Appeals, "[s]ince the agreement x
x x is a mere contract to sell, the full payment of the purchase price partakes of a suspensive condition. The nonfulfillment of the condition prevents the obligation to sell from arising and ownership is retained by the seller
51
without further remedies by the buyer." Similarly, we held in Reyes v. Tuparan that "petitioners obligation to
sell the subject properties becomes demandable only upon the happening of the positive suspensive condition,
which is the respondents full payment of the purchase price.Without respondents full payment, there can be no
breach of contract to speak of because petitioner has no obligation yet to turn over the title. Respondents
failure to pay in full the purchase price in full is not the breach of contract contemplated under Article 1191 of the
New Civil Code but rather just an event that prevents the petitioner from being bound to convey title to
respondent." Otherwise stated, Rodolfo has no right to compel Nicolas to transfer ownership to him because he
failed to pay in full the purchase price. Correlatively, Nicolas has no obligation to transfer his ownership over his
52
share in the Diego Building to Rodolfo.
Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to fix the period for Rodolfos
payment of the balance of the purchase price. It was not Nicolass obligation to compel Rodolfo to pay the balance;
it was Rodolfos duty to remit it.
It would appear that after Nicolas refused to sign the deed as there was yet no full payment, Rodolfo and Eduardo
hired the services of the Daroya Accounting Office "for the purpose of estimating the amount to which [Nicolas]
still owes [Rodolfo] as a consequence of the unconsummated verbal agreement regarding the formers share in the
53
co-ownership of [Diego Building] in favor of the latter." According to the accountants report, after Nicolas
revoked his agreement with Rodolfo due to non-payment, the downpayment of P250,000.00 was considered a
54
55
loan of Nicolas from Rodolfo. The accountant opined that the P250,000.00 should earn interest at 18%. Nicolas

however objected as regards the imposition of interest as it was not previously agreed upon. Notably, the contents
of the accountants report were not disputed or rebutted by the respondents. In fact, it was stated therein that
"[a]ll the bases and assumptions made particularly in the fixing of the applicable rate of interest have been
56
discussed with [Eduardo]."
We find it irrelevant and immaterial that Nicolas described the termination or cancellation of his agreement with
Rodolfo as one of rescission. Being a layman, he is understandably not adept in legal terms and their implications.
Besides, this Court should not be held captive or bound by the conclusion reached by the parties. The proper
characterization of an action should be based on what the law says it to be, not by what a party believed it to be.
57
"A contract is what the law defines it to be x x x and not what the contracting parties call it."
On the other hand, the respondents additional submission that Nicolas cheated them by "vanishing and
hibernating" in the USA after receiving Rodolfos P250,000.00 downpayment, only to come back later and claim
that the amount he received was a mere loan cannot be believed. How the respondents could have been
cheated or disadvantaged by Nicolass leaving is beyond comprehension. If there was anybody who benefited from
Nicolass perceived "hibernation", it was the respondents, for they certainly had free rein over Nicolass interest in
the Diego Building. Rodolfo put off payment of the balance of the price, yet, with the aid of Eduardo, collected and
appropriated for himself the rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in the rents.
For his complicity, bad faith and abuse of authority as the Diego Building administrator, Eduardo must be held
solidarily liable with Rodolfo for all that Nicolas should be entitled to from 1993 up to the present, or in respect of
actual damages suffered in relation to his interest in the Diego Building. Eduardo was the primary cause of
Nicolass loss, being directly responsible for making and causing the wrongful payments to Rodolfo, who received
them under obligation to return them to Nicolas, the true recipient.1wphi1 As such, Eduardo should be principally
responsible to Nicolas as well. Suffice it to state that every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith; and every
person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the
58
same.
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the absence of stipulation, the court can award the same when the
defendants act or omission has compelled the plaintiff to incur expenses to protect his interest or where the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just and
59
demandable claim." In the instant case, it is beyond cavil that petitioner was constrained to file the instant case
to protect his interest because of respondents unreasonable and unjustified refusal to render an accounting and
to remit to the petitioner his rightful share in rents and fruits in the Diego Building. Thus, we deem it proper to
60
award to petitioner attorneys fees in the amount of P50,000.00, as well as litigation expenses in the amount
ofP20,000.00 and the sum of P1,000.00 for each court appearance by his lawyer or lawyers, as prayed for.
WHEREFORE, premises considered, the Petition is GRANTED. The June 29, 2007 Decision and October 3, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan City
Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are hereby ANNULLED and SET ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner Nicolas P. Diego and respondent Rodolfo P. Diego
isDECLARED terminated/cancelled;

2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to surrender possession and control,
as the case may be, of Nicolas P. Diegos share in the Diego Building. Respondents are further commanded
to return or surrender to the petitioner the documents of title, receipts, papers, contracts, and all other
documents in any form or manner pertaining to the latters share in the building, which are deemed to be
in their unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to immediately render an
accounting of all the transactions, from the period beginning 1993 up to the present, pertaining to Nicolas
P. Diegos share in the Diego Building, and thereafter commanded to jointly and severally remit to the
petitioner all rents, monies, payments and benefits of whatever kind or nature pertaining thereto, which
are hereby deemed received by them during the said period, and made to them or are due, demandable
and forthcoming during the said period and from the date of this Decision, with legal interest from the
filing of the Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED, immediately and without further
delay upon receipt of this Decision, to solidarily pay the petitioner attorneys fees in the amount
ofP50,000.00; litigation expenses in the amount of P20,000.00 and the sum of P1,000.00 per counsel for
each court appearance by his lawyer or lawyers;
5. The payment of P250,000.00 made by respondent Rodolfo P. Diego, with legal interest from the filing of
the Complaint, shall be APPLIED, by way of compensation, to his liabilities to the petitioner and to answer
for all damages and other awards and interests which are owing to the latter under this Decision; and
6. Respondents counterclaim is DISMISSED.
SO ORDERED.
MARIANO
Associate Justice

C.

DEL

CASTILLO

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and ANTONIO PALAO, represented by his
Attorney-in-Fact, FELISA P. DELOS SANTOS,respondents.
DECISION
QUISUMBING, J.:
[1]

This petition assails the Decision dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949,
affirming the decision of the Regional Trial Court and deleting the award of attorneys fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an undivided portion
of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of Tuguegarao and covered by Transfer
[2]
Certificate of Title No. T-5790. The parties executed a Deed of Sale on the same date with the purchase price
of P295,000.00, payable as follows:
(a) P10,000.00 upon the execution of this instrument, and for this purpose, the vendor acknowledges having
received the said amount from the vendee as of this date;

(b) P140,000.00 on or before April 30, 1985;

(c) P145,000.00 on or before December 31, 1985.

[3]

When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a
[4]
letter to Iringan stating that he considered the contract as rescinded and that he would not accept any further
payment considering that Iringan failed to comply with his obligation to pay the full amount of the second
installment.
[5]

On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino, replied that they were not
opposing the revocation of the Deed of Sale but asked for the reimbursement of the following amounts:
(a) P50,000.00 cash received by you;
(b) P3,200.00 geodetic engineers fee;
(c) P500.00 attorneys fee;
[6]
(d) the current interest on P53,700.00.
[7]

In response, Palao sent a letter dated January 10, 1986, to Atty. Aquino, stating that he was not amenable
to the reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by a new counsel Atty. Carmelo Z. Lasam, proposed that
[8]
the P50,000 which he had already paid Palao be reimbursed or Palao could sell to Iringan, an equivalent portion
of the land.
Palao instead wrote Iringan that the latters standing obligation had reached P61,600, representing payment
[9]
of arrears for rentals from October 1985 up to March 1989. The parties failed to arrive at an agreement.
On July 1, 1991, Palao filed a Complaint
against Iringan and his wife.

[10]

for Judicial Confirmation of Rescission of Contract and Damages

[11]

In their Answer, the spouses alleged that the contract of sale was a consummated contract, hence, the
remedy of Palao was for collection of the balance of the purchase price and not rescission. Besides, they said that
they had always been ready and willing to comply with their obligations in accordance with said contract.
[12]

In a Decision dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I, ruled in favor of
Palao and affirmed the rescission of the contract. It disposed,
WHEREFORE, the Court finds that the evidence preponderates in favor of the plaintiff and against the defendants
and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
(b) Cancelling the adverse claim of the defendants annotated at the back of TCT No. T-5790;
(c) Ordering the defendants to vacate the premises;
(d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as reasonable compensation for
use of the property minus 50% of the amount paid by them; and to pay P50,000.00 as moral damages;P10,000.00
as exemplary damages; and P50,000.00 as attorneys fee; and to pay the costs of suit.
SO ORDERED.

[13]

As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review.

Iringan avers in this petition that the Court of Appeals erred:

1. In holding that the lower court did not err in affirming the rescission of the contract of sale; and
2. In holding that defendant was in bad faith for resisting rescission and was made liable to pay moral
[14]
and exemplary damages.
We find two issues for resolution: (1) whether or not the contract of sale was validly rescinded, and (2)
whether or not the award of moral and exemplary damages is proper.
[15]

On the first issue, petitioner contends that no rescission was effected simply by virtue of the letter sent by
respondent stating that he considered the contract of sale rescinded. Petitioner asserts that a judicial or notarial
act is necessary before one party can unilaterally effect a rescission.
Respondent Palao, on the other hand, contends that the right to rescind is vested by law on the obligee and
since petitioner did not oppose the intent to rescind the contract, Iringan in effect agreed to it and had the legal
effect of a mutually agreed rescission.
Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable property.
Article 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay
the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the contract has been made upon him
either judicially or by a notarial act. After the demand, the court may not grant him a new term. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the
[16]
contract.
In the case of Villaruel v. Tan King,

[17]

we ruled in this wise,

since the subject-matter of the sale in question is real property, it does not come strictly within the provisions of
article 1124 (now Article 1191) of the Civil Code, but is rather subjected to the stipulations agreed upon by the
[18]
contracting parties and to the provisions of article 1504 (now Article 1592) of the Civil Code.
Citing Manresa, the Court said that the requirement of then Article 1504, refers to a demand that the
vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no
[19]
obstacles to this contractual mode of extinguishing obligations.
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. It is to be noted that the law uses the phrase even
[20]
though emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial
requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual agreement to
rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible. [Emphasis ours.]
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic
[21]
rescission. In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191) of the Civil Code, the right
to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to comply with what is
incumbent upon him. But that right must be invoked judicially. The same article also provides: The Court shall
decree the resolution demanded, unless there should be grounds which justify the allowance of a term for the
performance of the obligation.
This requirement has been retained in the third paragraph of Article 1191, which states that the court shall
decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
[22]

Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso
facto erased by the failure of the other party to comply with what is incumbent upon him. The party entitled to
[23]
rescind should apply to the court for a decree of rescission. The right cannot be exercised solely on a partys
[24]
own judgment that the other committed a breach of the obligation. The operative act which produces the
[25]
resolution of the contract is the decree of the court and not the mere act of the vendor. Since a judicial or
notarial act is required by law for a valid rescission to take place, the letter written by respondent declaring his
intention to rescind did not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private respondent filed an action for Judicial
[26]
Confirmation of Rescission and Damages before the RTC, he complied with the requirement of the law for
[27]
judicial decree of rescission. The complaint categorically stated that the purpose was 1) to compel appellants to
formalize in a public document, their mutual agreement of revocation and rescission; and/or 2) to have a judicial
confirmation of the said revocation/rescission under terms and conditions fair, proper and just for both
[28]
[29]
parties. In Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., we held that even a crossclaim found in the
[30]
Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.
Petitioner contends that even if the filing of the case were considered the judicial act required, the action
[31]
should be deemed prescribed based on the provisions of Article 1389 of the Civil Code.
[32]

[33]

This provision of law applies to rescissible contracts, as enumerated and defined in Articles 1380 and
[34]
1381. We must stress however, that the rescission in Article 1381 is not akin to the term rescission in Article
[35]
1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution
or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for
[36]
lesion as enumerated in said article.
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article
[37]
1144, which provides that the action upon a written contract should be brought within ten years from the time
the right of action accrues. The suit was brought on July 1, 1991, or six years after the default. It was filed within
the period for rescission. Thus, the contract of sale between the parties as far as the prescriptive period applies,
can still be validly rescinded.
On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in finding
[38]
bad faith on his part when he resisted the rescission and claimed he was ready to pay but never actually paid
respondent, notwithstanding that he knew that appellees principal motivation for selling the lot was to raise
[39]
[40]
money to pay his SSS loan. Petitioner would have us reverse the said CA findings based on the exception that
these findings were made on a misapprehension of facts.
The records do not support petitioners claims. First, per the records, petitioner knew respondents reason
[41]
[42]
for selling his property. As testified to by petitioner and in the deposition of respondent, such fact was made
[43]
known to petitioner during their negotiations as well as in the letters sent to petitioner by Palao. Second,
petitioner adamantly refused to formally execute an instrument showing their mutual agreement to rescind the
contract of sale, notwithstanding that it was petitioner who plainly breached the terms of their contract when he
did not pay the stipulated price on time, leaving private respondent desperate to find other sources of funds to pay

off his loan. Lastly, petitioner did not substantiate by clear and convincing proof, his allegation that he was ready
and willing to pay respondent. We are more inclined to believe his claim of readiness to pay was an afterthought
intended to evade the consequence of his breach. There is no record to show the existence of such amount, which
could have been reflected, at the very least, in a bank account in his name, if indeed one existed; or, alternatively,
[44]
the proper deposit made in court which could serve as a formal tender of payment. Thus, we find the award of
moral and exemplary damages proper.
WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of Appeals in CA
G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the award of attorneys fees, is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.