Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-69901

July 31, 1987

ANTONIO RAMON ONGSIAKO, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and THE PEOPLE OF THE PHILIPPINES, respondents.
CRUZ, J.:
Prosecuted for reckless imprudence resulting in multiple physical injuries and damage to property, the petitioner was convicted by the
trial court* of only simple negligence resulting in serious physical injuries and damage to property. He was sentenced to two months of
arresto mayor and to pay a total indemnity of P143,131.04 for medical expenses, unearned salaries and as moral damages.1 On
appeal, the conviction was affirmed but the respondent court** reduced the moral damages by P84,000.00, thus lowering the total
indemnity to P61,131,04.2 Still not satisfied, the petitioner has come to this Court for a complete reversal of the judgment below.
This case arose from a collision between the car being driven by the petitioner and the jeep of Robert Ha on December 30, 1981, at
about 4 o'clock in the afternoon. at MacArthur Highway, in Moncada, Tarlac. The petitioner had a companion, Leon Miguel Heras, who
was seated beside him. Robert Ha was at the wheel of his vehicle, which had seven other passengers. It appears that the petitioner
was south-bound, toward Manila, and the jeep was coming from the opposite direction; that a Philippine Rabbit bus ahead of the jeep
swerved into the petitioner's lane to overtake and bypass a tricycle; and that as a result of this sudden move, the petitioner, to avoid a
head-on collision, immediately veered his car to the shoulder of the highway. The car went out of control when it hit the soft shoulder,
moved back diagonally across the cemented highway, then collided with Ha's jeep, damaging it and causing multiple injuries to its
passengers. The Philippine Rabbit bus sped away.3
After considering the arguments of the parties in the petition itself, the comment thereon of the public respondent and the reply thereto,
we gave due course to this petition and required the parties to file simultaneous memoranda. The petitioner complied in due time but
the Solicitor General, to avoid repetitiousness, as he put it, merely adopted his sketchy comment as the memorandum for the
respondent.4
While this Court is ordinarily not a trier of facts, it has the authority to review and reverse the factual findings of the lower courts if it finds
that they do not conform to the evidence of record. We so find in this case, for reasons to be discussed presently.
The trial court held, and the respondent court affirmed, that "the jeep was still about 150 meters away from the Philippine Rabbit bus
when the accused drove his car toward the road sh ulder to avoid the collision with the oncoming bus. In other words, there was
sufficient time for Antonio Ramon Ongsiako to avail of a feasible time to avert hitting the jeep."5 The judge should have been more
careful in reaching this conclusion for it is not founded on the facts as established. The evidence of record is that the distance was not
150 meters but 150 feet, which makes quite a difference, indeed. The correct distance, incidentally, was established by no less than the
trial court itself which, in its examination of Robert Ha, the principal prosecution witness, elicited from him the said information in the
following exchange:
COURT:
Q: How far was the Philippine Rabbit bus ahead of you before the car swerved to your lane?
WITNESS
A: Approximately about 150 feet ahead of me, Your Honor. 6
The Court considers this discrepancy important because the finding of negligence by the trial court is based on whether or not the
accused had enough opportunity to avoid the collision. And that opportunity depended on the distance between the two vehicles. If the
trial judge had carefully considered the evidence and discovered that the distance was 150 feet and not meters, it is doubtful that he
would have concluded as he did that the accused was negligent. The distance of 150 feet is less than one-third of 150 meters, which
means that the sufficient time imagined by the trial judge would have been correspondingly and significantly reduced by two-thirds
of the actual period. The time as shortened could not have, if we apply the trial judge's own calculations, prevented the petitioner from
avoiding the collision.
Another indication of carelessness, this time on the part of the respondent court, is its observation, in rejecting the petitioner's version of
the collision, that "the police sketch of the collision scene fails to reveal any skidmarks of the appellant's car"7 on the highway. What is
rather odd about this finding is that the trial court, and the respondent court later, never considered the fact that the sketch was made
five days after the collision, as clearly emphasized by the petitioner in his brief. Apparently, it did not occur to the courts below and
this is also somewhat puzzling that all skidmarks would have disappeared by that time on the busy highway.
There was also apparent disregard of the record when the respondent court observed that the petitioner had not presented his
companion to testify on his behalf, concluding that "such failure to present Heras raises the presumption that his testimony, had it been
presented, would have been adverse to the appellant's cause (Orfanel v. People, 30 SCRA 825)."8 This is another careless conclusion.
The premise is incorrect, and so the conclusion must also be rejected. In fact, the petitioner did present Heras, and Heras did testify in
support of the petitioner, substantially corroborating the petitioner's account of the collision. A reading of the transcript of the
stenographic notes in the hearing of the case on July 27, 1983, will readily disclose this.9
The Court is also perplexed by the following portion of the appealed decision:
If it was true that appellant lost control of his vehicle as early as when his car hit the shoulder of the road, it was extremely stupid of him
to move his car back to the highway while his car was still out of control. This is especially true in the face of his own admission that he
saw the Rabbit bus for the first time when it was stin about 200 meters away overtaking a vehicle (jeep of Robert Ha) which was
immediately behind a tricycle (p. 2, Ibid.). Assuming that appellant indeed lost control of his car as he hit the shoulder, he should have
applied full not a little pressure upon his brakes. He should have stopped his vehicle instead of driving it back to the highway and risking
collision with oncoming vehicles. 10

As the car was "still out of control," why is it assumed that the petitioner would nonetheless be able, although this would be "extremely
stupid," to move it back to the highway? It is really mystifying that the respondent court would still expect the petitioner to control the car
which, as it says so itself, was then "out of control." "Assuming the appellant indeed lost control of his car as he hit the shoulder," the
decision adds, "he should have stopped his vehicle instead of driving it back to the highway and risking collision with oncoming
vehicles." This is hardly logical. The court cannot assume that the petitioner lost control of his vehicle and on that assumption fault him
for not correctly controlling it. That would be impossible, to say the least. When one loses control of his car, he cannot direct it the way
he wants, or move it in the direction he chooses, or accelerate or stop it, for the simple reason that it is precisely out of control. A car
out of control is simply out of control, period. As for the "little pressure" the petitioner says he applied on the brakes, the purpose,
according to him, was to prevent his car from turning turtle as a result of a sudden stop that would have been caused by his jamming on
the brakes.
The real culprit in this unfortunate incident, as the Court sees it, could be the driver of the Philippine Rabbit bus whose recklessness
was the cause of the collision between the petitioner's car and Robert Ha's jeep. We notice that the trial court made the meaningful
observation that "the Philippine Rabbit bus may be faulted," but added rather helplessly, that "it is not here charged."11 We hope it did
not mean by this that someone else had to be made liable, to vindicate the victims' rights.
It seems to us that a simple investigation would have uncovered the Identity and whereabouts of the Rabbit bus driver, with a view to
his prosecution for his involvement in the collision. Why this was not done reflects on the sense of duty of the law-enforcement officers
who investigated this matter and on the resourcefulness of the petitioner and his counsel whose cause could have improved with the
indictment of the said driver.
At any rate, it is the finding of the Court, in view of the misappreciation of the evidence of record by the respondent court and the trial
court, that the guilt of the petitioner has not been proved beyond reasonable doubt. Consequently, he should not have been held guilty
of even simple negligence and instead is entitled to be completely absolved of criminal responsibility.
The civil liability is, however, a different question.
While the quantum of proof necessary for conviction has not been established, there is, in our view, a preponderance of evidence to
hold the petitioner liable in damages for the injuries sustained by the victims of this accident. Although it is really doubtful that he was
criminally negligent, we find there is enough evidence to sustain the conclusion that a little more caution and discretion on his part in
reacting to the threat of a head-on collision with the oncoming bus, could have avoided the unfortunate accident. For this shortcoming,
we hold him liable for the hospitalization expenses and unearned salaries of the victims as itemized by the trial court and affirmed by
the respondent court. We absolve him, however, from the payment of moral damages and so reduce his total civil liability to
P46,131.04.
We apply here the doctrine announced in the recent case of People v. Ligon,12 where the accused was acquitted of the crime of
homicide for lack of clear and convincing proof that he had criminally caused a cigarette vendor to fall to his death from the jeep where
he was hanging onto. Nevertheless, from the totality of the facts presented, we declared there was a preponderance of evidence to hold
the accused liable in damages for the tragic mishap that befell the victim. We make a similar finding in this case and hold the petitioner
civilly answerable for his quasi-delict.
WHEREFORE, the petitioner is ACQUITTED and his conviction is REVERSED, but he is held liable in the total sum of P46,131.04 for
damages as above specified. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6913

November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendant-appellant.
J. Lopez Vito, for appellant.
Arroyo and Horrilleno, for appellee.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the plaintiff the sum of P6,641,
with interest at the legal rate from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital and that
father Agustin de la Pea was the duly authorized representative of the plaintiff to receive the legacy. The defendant is the
administrator of the estate of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such trustee the sum of P6,641, collected by
him for the charitable purposes aforesaid. In the same year he deposited in his personal account P19,000 in the Hongkong and
Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested by the military
authorities as a political prisoner, and while thus detained made an order on said bank in favor of the United States Army officer under
whose charge he then was for the sum thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in
the bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus deposited had been
collected by him for revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was
confiscated and turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included in the P19,000
deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion that said trust funds were a part of
the funds deposited and which were removed and confiscated by the military authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact counterpart in the Roman law and has none
under the Spanish law. In this jurisdiction, therefore, Father De la Pea's liability is determined by those portions of the Civil Code which
relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a
good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable,
with the exception of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume an obligation different from
that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the mo ney at
all hazards. If the had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a
state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he
placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who
must respond at all hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by depositing the money in
the bank than he would if he had left it in his home; or whether he was more or less negligent by depositing the money in his personal
account than he would have been if he had deposited it in a separate account as trustee. We regard such discussion as substantially
fruitless, inasmuch as the precise question is not one of negligence. There was no law prohibiting him from depositing it as he did and
there was no law which changed his responsibility be reason of the deposit. While it may be true that one who is under obligation to do
or give a thing is in duty bound, when he sees events approaching the results of which will be dangerous to his trust, to take all
reasonable means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel constrained to hold
that, in choosing between two means equally legal, he is culpably negligent in selecting one whereas he would not have been i f he had
selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by Father De la Pea in
the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from the bank by the armed forces of the
United States during the war of the insurrection; and that said Father De la Pea was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint.
Arellano, C.J., Torres and Carson, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 91029

February 7, 1991

NORKIS DISTRIBUTORS, INC., petitioner,

vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.
Jose D. Palma for petitioner.
Public Attorney's Office for private respondent.

GRIO-AQUINO, J.:p
Subject of this petition for review is the decision of the Court of Appeals (Seventeenth Division) in CA-G.R. No. 09149, affirming with
modification the judgment of the Regional Trial Court, Sixth (6th) Judicial Region, Branch LVI. Himamaylan, Negros Occidental, in Civil
Case No. 1272, which was private respondent Alberto Nepales' action for specific performance of a contract of sale with damages
against petitioner Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha motorcycles in Negros Occidental with office in
Bacolod City with Avelino Labajo as its Branch Manager. On September 20, 1979, private respondent Alberto Nepales bought from the
Norkis-Bacolod branch a brand new Yamaha Wonderbike motorcycle Model YL2DX with Engine No.
L2-329401K Frame No. NL2-0329401, Color Maroon, then displayed in the Norkis showroom. The price of P7,500.00 was payable by
means of a Letter of Guaranty from the Development Bank of the Philippines (DBP), Kabankalan Branch, which Norkis' Branch
Manager Labajo agreed to accept. Hence, credit was extended to Nepales for the price of the motorcycle payable by DBP upon release
of his motorcycle loan. As security for the loan, Nepales would execute a chattel mortgage on the motorcycle in favor of DBP. Branch
Manager Labajo issued Norkis Sales Invoice No. 0120 (Exh.1) showing that the contract of sale of the motorcycle had been perfected.
Nepales signed the sales invoice to signify his conformity with the terms of the sale. In the meantime, however, the motorcycle
remained in Norkis' possession.
On November 6, 1979, the motorcycle was registered in the Land Transportation Commission in the name of Alberto Nepales. A
registration certificate (Exh. 2) in his name was issued by the Land Transportation Commission on November 6, 1979 (Exh. 2-b). The
registration fees were paid by him, evidenced by an official receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was allegedly the agent of Alberto Nepales but the
latter denies it (p. 15, t.s.n., August 2, 1984). The record shows that Alberto and Julian Nepales presented the unit to DBP's AppraiserInvestigator Ernesto Arriesta at the DBP offices in Kabankalan, Negros Occidental Branch (p. 12, Rollo). The motorcycle met an
accident on February 3, 1980 at Binalbagan, Negros Occidental. An investigation conducted by the DBP revealed that the unit was
being driven by a certain Zacarias Payba at the time of the accident (p. 33, Rollo). The unit was a total wreck (p. 36, t.s.n., August
2,1984; p. 13, Rollo), was returned, and stored inside Norkis' warehouse.
On March 20, 1980, DBP released the proceeds of private respondent's motorcycle loan to Norkis in the total sum of P7,500. As the
price of the motorcycle later increased to P7,828 in March, 1980, Nepales paid the difference of P328 (p. 13, Rollo) and demanded the
delivery of the motorcycle. When Norkis could not deliver, he filed an action for specific performance with damages against Norkis in
the Regional Trial Court of Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was docketed as Civil
Case No. 1272. He alleged that Norkis failed to deliver the motorcycle which he purchased, thereby causing him damages.
Norkis answered that the motorcycle had already been delivered to private respondent before the accident, hence, the risk of loss or
damage had to be borne by him as owner of the unit.
After trial on the merits, the lower court rendered a decision dated August 27, 1985 ruling in favor of private respondent (p. 28, Rollo.)
thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants. The defendants are ordered to pay solidarity to
the plaintiff the present value of the motorcycle which was totally destroyed, plus interest equivalent to what the Kabankalan SubBranch of the Development Bank of the Philippines will have to charge the plaintiff on fits account, plus P50.00 per day from February
3, 1980 until full payment of the said present value of the motorcycle, plus P1,000.00 as exemplary damages, and costs of the litigation.
In lieu of paying the present value of the motorcycle, the defendants can deliver to the plaintiff a brand-new motorcycle of the same
brand, kind, and quality as the one which was totally destroyed in their possession last February 3, 1980. (pp. 28-29, Rollo.)
On appeal, the Court of appeals affirmed the appealed judgment on August 21, 1989, but deleted the award of damages "in the amount
of Fifty (P50.00) Pesos a day from February 3, 1980 until payment of the present value of the damaged vehicle" (p35, Rollo). The Court
of Appeals denied Norkis' motion for reconsideration. Hence, this Petition for Review.
The principal issue in this case is who should bear the loss of the motorcycle. The answer to this question would depend on whether
there had already been a transfer of ownership of the motorcycle to private respondent at the time it was destroyed.
Norkis' theory is that:
. . . After the contract of sale has been perfected (Art. 1475) and even before delivery, that is, even before the ownership is transferred
to the vendee, the risk of loss is shifted from the vendor to the vendee. Under Art. 1262, the obligation of the vendor to deliver a
determinate thing becomes extinguished if the thing is lost by fortuitous event (Art. 1174), that is, without the fault or fraud of the vendor
and before he has incurred in delay (Art. 11 65, par. 3). If the thing sold is generic, the loss or destruction does not extinguish the
obligation (Art. 1263). A thing is determinate when it is particularly designated or physically segregated from all others of the same class
(Art. 1460). Thus, the vendor becomes released from his obligation to deliver the determinate thing sold while the vendee's obligation to
pay the price subsists. If the vendee had paid the price in advance the vendor may retain the same. The legal effect, therefore, is that

the vendee assumes the risk of loss by fortuitous event (Art. 1262) after the perfection of the contract to the time of delivery. (Civil Code
of the Philippines, Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle. However, it insists that there was constructive delivery of the unit
upon: (1) the issuance of the Sales Invoice No. 0120 (Exh. 1) in the name of the private respondent and the affixing of his signature
thereon; (2) the registration of the vehicle on November 6, 1979 with the Land Transportation Commission in private respondent's name
(Exh. 2); and (3) the issuance of official receipt (Exh. 3) for payment of registration fees (p. 33, Rollo).
That argument is not well taken. As pointed out by the private respondent, the issuance of a sales invoice does not prove transfer of
ownership of the thing sold to the buyer. An invoice is nothing more than a detailed statement of the nature, quantity and cost of the
thing sold and has been considered not a bill of sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of delivery whether constructive or actual, be coupled with the intention of delivering
the thing. The act, without the intention, is insufficient (De Leon, Comments and Cases on Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private respondent, Norkis did not intend yet to transfer the title or
ownership to Nepales, but only to facilitate the execution of a chattel mortgage in favor of the DBP for the release of the buyer's
motorcycle loan. The Letter of Guarantee (Exh. 5) issued by the DBP, reveals that the execution in its favor of a chattel mortgage over
the purchased vehicle is a pre-requisite for the approval of the buyer's loan. If Norkis would not accede to that arrangement, DBP would
not approve private respondent's loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which gives legal effect to the act, is the actual intention of
the vendor to deliver, and its acceptance by the vendee. Without that intention, there is no tradition (Abuan vs. Garcia, 14 SCRA 759).
In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court held:
The Code imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be delivered when it is "placed in
the hands and possession of the vendee." (Civil Code, Art. 1462). It is true that the same article declares that the execution of a public
instrument is equivalent to the delivery of the thing which is the object of the contract, but, in order that this symbolic delivery may
produce the effect of tradition, it is necessary that the vendor shall have had such control over the thing sold that, at the moment of the
sale, its material delivery could have been made. It is not enough to confer upon the purchaser the ownership and the right of
possession. The thing sold must be placed in his control. When there is no impediment whatever to prevent the thing sold passing into
the tenancy of the purchaser by the sole will of the vendor, symbolic delivery through the execution of a public instrument is sufficient.
But if notwithstanding the execution of the instrument, the purchaser cannot have the enjoyment and material tenancy of the thing and
make use of it himself or through another in his name, because such tenancy and enjoyment are opposed by the interposition of
another will, then fiction yields to reality-the delivery has riot been effects .(Emphasis supplied.)
The Court of Appeals correctly ruled that the purpose of the execution of the sales invoice dated September 20, 1979 (Exh. B) and the
registration of the vehicle in the name of plaintiff-appellee (private respondent) with the Land Registration Commission (Exhibit C) was
not to transfer to Nepales the ownership and dominion over the motorcycle, but only to comply with the requirements of the
Development Bank of the Philippines for processing private respondent's motorcycle loan. On March 20, 1980, before private
respondent's loan was released and before he even paid Norkis, the motorcycle had already figured in an accident while driven by one
Zacarias Payba. Payba was not shown by Norkis to be a representative or relative of private respondent. The latter's supposed relative,
who allegedly took possession of the vehicle from Norkis did not explain how Payba got hold of the vehicle on February 3, 1980. Norkis'
claim that Julian Nepales was acting as Alberto's agent when he allegedly took delivery of the motorcycle (p. 20, Appellants' Brief), is
controverted by the latter. Alberto denied having authorized Julian Nepales to get the motorcycle from Norkis Distributors or to enter
into any transaction with Norkis relative to said motorcycle. (p. 5, t.s.n., February 6, 1985). This circumstances more than amply rebut
the disputable presumption of delivery upon which Norkis anchors its defense to Nepales' action (pp. 33-34, Rollo).
Article 1496 of the Civil Code which provides that "in the absence of an express assumption of risk by the buyer, the things sold remain
at seller's risk until the ownership thereof is transferred to the buyer," is applicable to this case, for there was neither an actual nor
constructive delivery of the thing sold, hence, the risk of loss should be borne by the seller, Norkis, which was still the owner and
possessor of the motorcycle when it was wrecked. This is in accordance with the well-known doctrine of res perit domino.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. No. 09149, we deny the petition for review
and hereby affirm the appealed decision, with costs against the petitioner.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-10244

February 29, 1916

SANTIAGO CRUZADO, plaintiff-appellant,

vs.
ESTEFANIA BUSTOS and MANUEL ESCALER, defendants-appellees.
Felix Ferrer for appellant.
Augusto Gonzalez for appellees.
TORRES, J.:
This appeal, by bill of exceptions, was taken from the judgment of June 17, 1914, in which the trial judge absolved defendants from the
complaint and plaintiff from the cross-complaint, without express finding as to costs. Counsel for plaintiff appealed from this judgment
and moved for a new trial. This motion was denied, exception was taken by appellant, and, on the filing of the proper bill of exceptions,
the same was approved, certified, and transmitted to the clerk of this court, together with a transcript of the evidence introduced at the
trial.
Counsel for the plaintiff Santiago Cruzado filed a written complaint on October 8, 1910, amended on September 25, 1913, in which he
alleged that plaintiff was the owner of certain rural property situated in the barrio of Dolores, formerly San Isidro, of the municipality of
Bacolor, Pampanga, containing an area of 65 balitas and bounded as set forth in the complaint; that Estafania Bustos, during her
lifetime, and now the administrator of her estate, together with the other defendant, Manuel Escaler, had, since the year 1906 up to the
present, been detaining the said parcel of land, and had refused to deliver the possession thereof to plaintiff and to recognize his
ownership of the same, notwithstanding the repeated demands made upon them; that by such detention, the plaintiff had suffered
losses and damages to the amount of P3,500. He therefore asked for judgment declaring plaintiff to be the owner of the said parcel of
land and ordering defendants to return it to plaintiff and to pay the latter P3,500 for losses and damages, and the costs.
The demurrer filed by the defendant Bustos having been overruled, in her answer she made a general denial of each and all of the
allegations of the complaint, and of each and all of the paragraphs thereof, and, as a special defense, alleged that the title to the said
land, produced by the plaintiff, was not a lawful one, for the reason that only a simulated sale of the land was made by the between
herself and the deceased Agapito Geronimo Cruzado, plaintiff's father, and that for more than thirty years preceding the present time
she had been the sole, exclusive, and lawful owner of the said parcel of land in question; that she had been holding it quietly,
peaceably, publicly and in good faith; that it formed an integral part of another larger parcel of land, both parcels aggregating a total
area of 100 balitas, 9 loanes, and 41 square brazas; that in September, 1891, with plaintiff's knowledge, the defendant Bustos sold and
conveyed all the said property to the other defendant Manuel Escaler who then acquired the possession and ownership of the said
parcel of land, and had retained such ownership and possession up to the present time; that at no time and on no account whatever
had plaintiff or any other person except defendants acquired possession of the said parcel of land or any part thereof, nor any right or
title therein. She therefore prayed to be absolved from the complaint, with the costs against plaintiff.
The other defendant, Manuel Escaler, in an amended answer to the aforementioned complaint, denied each and all of the allegations
therein contained and each and all of its clauses, and, as a special defense, alleged that plaintiff's title to the said land was illegal as
only a simulated sale was made by and between Agapito Geronimo Cruzado, plaintiff's predecessor in interest, and Bernardino Dizon;
that defendants had been in possession of the said parcel of land for more than thirty years; that the defendant Escaler in good faith
purchased the land in question from Estefania Bustos, widow of Dizon, without ever having had any notice of any defect in the vendor's
title; that plaintiff had knowledge of the contract of sale of the land in question yet did nothing to oppose its purchase by the defendant
Escaler, wherefore the latter, in acquiring the property, did so under the belief that the plaintiff Santiago Cruzado had no right or interest
therein. He therefore prayed that the complaint be dismissed, with the costs against plaintiff, and that an injunction issue to restrain the
latter from interfering with the defendant Escaler in the enjoyment of his property and rights and from performing any act prejudicial to
his interests.
On the case coming to trial, both parties adduced evidence, among which was included the deposition of Inocencio Rosete.
Counsel for defendants, in a cross-complaint set forth: that as shown by the evidence, the defendant Escaler acquired in good faith
from Estefania Bustos the land in question at a time when there was no record whatever in the property registry to show that this land
belonged to a third person or any other than the vendor; that, on entering into possession of the property, Escaler spent P4,000 inimprovements and in the repair of a long dike to prevent the erosion of the land by the frequent overflows of the adjoining estuary; that
of this sum P2,000 was paid by Escaler and the remaining P2,000 by Estafania Bustos, in her capacity as lessee of the land; and that in
case the judgment of the court should be adverse to defendants, these latter, as owners in good faith, were entitled to be indemnified
by plaintiff for the said expenses. He therefore asked that plaintiff be ordered to reimburse half of the said P4,000 to each of the
defendants in case judgment should be rendered favorable to plaintiff.
The latter's counsel, in answer to the said cross-complaint, specifically denied each and all of the allegations thereof and, in special
defense, reproduced plaintiff's amended complaint in all its parts and alleged that the facts set forth in the cross-complaint did not
constitute a cause of action. He therefore prayed that plaintiff be absolved from the cross-complaint and that judgment be rendered
against defendants, in conformity with the prayer of his complaint.
After the evidence was all in, counsel for the defendant Escaler moved that the deposition of the witness Inocencio Espanol Rosete be
admitted into the record, and in support of his motion stated that with the authorization of the court the said deposition had been taken
on November 21, 1913, in the municipality of Arayat in the presence of plaintiff's attorney; that the said declaration of the deponent was
duly forwarded to the clerk of the court, and there attached to the record, but through an unintentional oversight of defendant's attorney,
it was not presented in evidence at the trial; that this deposition was very important for the defendants' defense; and that the deponent
was and continued to be unable to appear before the court on account of a threatened attack of brain fever which might develop during
the journey from Arayat to San Fernando.
Plaintiff's counsel asked that the foregoing motion be overruled and that the deposition of the witness Rosete be stricken from the
record, because defendants' motion was made out of time and was contrary to the rules of procedure, and there was no reason for
altering the order of procedure, as requested by defendants, for, when the period for the reception of the evidence of both parties is
closed, an alteration in the order of procedure such as asked by defendants would be improper and illegal, counsel citing the decision

of this court in the case of Garcia vs. Reyes.1 He alleged, moreover, that the said deposition necessarily affected the main issue in
controversy and that to allow the motion would be in contravention of the provisions of section 364 of the Code of Civil Procedure. He
therefore asked that the said motion be overruled. The court, however, ordered that the deposition of the witness Inocencio Rosete be
admitted in evidence, and that plaintiff's exception be noted. In view of the foregoing, the judgment aforementioned was rendered.
The questions herein submitted for the decision of this court are:
1. Is it or is it not true that the deed of sale, Exhibit A, (p. 40 of the record) of 65 balitas of land situated in the municipality of Bacolor,
Pampanga, executed by Estefania Bustos, with the assistance of her husband Bernardino Dizon, in favor of Agapito Geronimo
Cruzado, for the sum of P2,200, was simulated, not with intent to defraud any third person, but for the sole purpose of making it appear
that the vendee, Cruzado, then a candidate for the position of procurador on the date of the said deed, September 7,1875, possessed
real estate to the value of P2,200 with which to guarantee the faithful discharge of the duties of the office of procurador?
2. It is or is it not true that, notwithstanding such apparent alienation of the 65 balitas of land, the supposed vendee continued in
possession thereof, without the supposed purchaser having taken possession of the property until September 10, 1891, when its owner
Bustos sold to Escaler, not only the said 65 balitas of land, but also all the remainder of a large tract of agricultural land of which the
portion appearing as sold to Agapito G. Cruzado formed and forms a part, and that Escaler was then and, until the date of plaintiff's
claim, continued to be in peaceable, uninterrupted possession of the said whole tract of land, including the aforementioned portion of 65
balitas?
3. Has the right of ownership prescribed which Manuel Escaler is and has been enjoying in the land which Estefania Bustos had sold to
him and which includes the parcel of 65 balitas claimed by plaintiff, Santiago Cruzado, or has the right of any real or personal action he
might exercise by reason of the sale to Cruzado prescribed on account of the lapse of the respective periods fixed by law, between the
7th of September, 1875, the date of said sale, and the 8th of October, 1910, that of the filing of the complaint?
To judge from the evidence adduced in this case, there is ample ground for holding that the said deed of sale of a parcel of 65 balitas of
land was simulated, not to defraud any creditor or other person interested in the land nor for the purpose of eluding any lawful obligation
on the part of its owner, Estafania Bustos, but for the sole purpose of doing a favor, of rendering a special service to Agap ito Geronimo
Cruzado, father of the plaintiff Santiago Cruzado.
During his lifetime Agapito G. Cruzado aspired to hold the office of procurador in the Court of First Instance of Pampanga, but
notwithstanding that he possessed the required ability for the discharge of the duties of that position, he was unable to give the required
bond, an indispensable condition for his appointment, as he was possessed of no means or real property wherewith to guarantee the
proper discharge of his duties in the manner prescribed by the laws then in force.
In the certified copy of the record of the case tried in the Secretaria de Gobierno of the abolished Real Audiencia de Manila, issued by
the Assistant Executive Secretary and chief of the division of archives, there appears on page 178 a decree by the presidencia of this
latter tribunal, issued by virtue of the resolution passed by the sala de gobierno on November 24, 1875, whereby it was ordered that
Agapito Geronimo Cruzado should be noticed that within the period of 30 days he must show proof of having furnished a bond of P700
in cash or of P2,100 in real property as security for the position of procurador to which he had been appointed, with the understanding
that should be fail to furnish such bond he would not be issued the certificate entitling him to practice the profession of procurador.
After complying with the requirements of the said court and executing the mortgage deed of the land purchased by the procurador elect
Cruzado from Estefania Bustos, on March 18, 1876, the mortgage was recorded in the old mortgage registry then kept in the office of
the Ayuntamiento of Manila during the former sovereignty, and thereafter Agapito G. Cruzado received his appointment and
commenced to discharge the duties of his position.
The above-related facts conclusively prove that Estefania Bustos executed the deed of sale Exhibit A in favor of the deceased Cruzado
in order to enable the latter, by showing that he was a property owner, to hold the office of procurador. This position he held for many
years, thanks to the liberality of the pretended vendor, who, notwithstanding the statements contained in the deed of sale, does not
appear to have been paid anything as a result of the sham sale, a sale which was affected, not in prejudice or fraud of any person, nor
those who were entitled to hold Cruzado liable for the proper discharge of the duties of his office, because, had the need arisen, any
liability of his could have been covered by the value of the land, the sale of which was fictitiously set forth in that deed as lawfully
belonging to Cruzado, and then Estefania Bustos would have had no right either to object to or escape the consequences of that
alienation, although simulated.
The simulation of the said sale was effected by making a pretended contract which bore the appearance of truth, when really and truly
there was no contract, because the contracting parties did not in fact intend to execute one, but only to formulate a sale in such a
manner that, for the particular purposes sought by Bustos and Cruzado, it would appear to have been celebrated solely that Cruzado
might hold his office of procurador on the strength of the security afforded by the value of the land feignedly sold.
The record does not show when the procurador Cruzado died, but it is unquestionable that he was still living during the last months of
1882, judging from the certificate which he himself issued to Norberto Decena (Exhibit 3). He must have died sometime between the
years 1882 and 1890, to judge from the contents of the letters plaintiff addressed to Natalio Dizon, one of the children of Estefania
Bustos, on July 7, 1891, and July 4, 1896, and from the fact that in the said year 1890 Agapito G. Cruzado was no longer a practicing
procurador in the Court of First Instance of Pampanga..
It is true that even after the death of the aforesaid procurador, any liability he might have incurred in connection with the exercise of his
office could have been, upon presentation of the proper claim, collected out of the value of the land apparently sold by Estafania Bustos
and pledged as security for the proper discharge of the duties of his office. On October 8, 1910, when his son Santiago Cruzado filed
his complaint, already more than twenty years had elapsed since 1889, if plaintiff's father died in 1889 and not between 1883 and 1889;
therefore, any right of action to foreclose the mortgage, or any personal action with regard to the value of the encumbered land, as the
result of any liability incurred in the performance of his duties as procurador, has more than prescribed. (Art. 1964, Civil Code, and
secs. 38, 39 and 43, Act. No. 190.).
On the termination of the sovereignty of Spain over this Archipelago, the Spanish courts here established went out of existence on
January 31, 1899, the Pampanga court indeed being abolished about the middle of 1897 as a result of the revolution against the former
sovereignty. The personnel of those courts also ceased to render service as such. It may therefore be affirmed that, if the said lien on
the land in question has not terminated by its no longer having any object, it is at least undeniable that prescription has already run with
respect to any action that might have been brought against the pledged land to recover for any liability which might have been incurred
by the procurador Cruzado during his lifetime in connection with his office, so that this real estate may now be considered as free from
that hypothecary encumbrance.

At the present time we have only to explain what rights Agapito G. Cruzado transmitted at his death to his son, the herein plaintiff, by
virtue of the deed of sale of the land in litigation, executed by its owner Estefania Bustos.
It is unquestionable that the contract of sale of the 65 balitas of land was perfect and binding upon both contracting parties, since they
both appear in that instrument to have agreed upon the thing sold, to wit, the 65 balitas of land, and upon the price, P2,200; but it is
also undeniable that the said contract was not consummated, inasmuch as, notwithstanding that the deed of sale Exhibit A was
accomplished and this document was kept by the pretended purchaser, it is positively certain that the latter did not pay the purchase
price of P2,200, and never took possession of the land apparently sold in the said deed. All that this vendee afterwards did was to
pledge the land on March 14, 1876, that is, six months and some days after the 7th of September, 1875, the date when he
purchased it as security for the faithful discharge of the duties of his office of procurador of the Court of First Instance of Pampanga.
The plaintiff, Santiago Cruzado, a son of the vendee, claiming that the said land was being detained by the vendor, or by the
administrator of the latter's estate or her death after the commencement of these proceedings, and by the other defendant Manuel
Escaler, prayed the court to declare him to be the owner thereof, to order the defendants to return it to him and to pay him for losses
and damages, and the costs.
The action brought by the plaintiff is evidently one for recovery of possession, founded on the right transmitted to him by his father at his
death, a right arising from the said simulated deed of sale of the land in question. This action is of course improper, not only because
the sale was simulated, but also because it was not consummated. The price of the land was not paid nor did the vendee take
possession of the property from the 7th of September, 1875, when the said sale was feigned, until the time of his death; nor did any of
his successors, nor the plaintiff himself until the date of his claim, enter into possession of the land.
It is indeed true that it is not necessary that the thing sold or its price should have been delivered in order that the contract of purchase
and sale be deemed perfect on account of its being consensual, and from it reciprocal obligations arise mutually to compel the parties
to effect its fulfillment; but there is no transmission of ownership until the thing, as in the case at bar, the land, has been delivered, and
the moment such delivery is made the contract of purchase and sale is regarded as consummated. Article 1450 of the Civil Code, relied
upon in this connection by the appellant, refers solely to the perfection of the contract and not to its consummation.
The purchaser is also a creditor with respect to the products of the thing sold, and article 1095 of the Civil Code prescribes as follows:
A creditor has a right to the fruits of a thing from the time the obligation to deliver it arises. However, he shall not acquire a property right
thereto until it has been delivered to him.
The provisions of this article are in agreement with that of the second paragraph of article 609 of the same Code, which is of the
following tenor:
Ownership is acquired by retention.
Ownership and other property rights are required and transmitted by law, by gift, by testate or intestate succession, and, in
consequence of certain contracts, by tradition.
They can also be acquired by prescription.
The provisions of the said article 1095 are also in accord with those of article 1462 which reads:
A thing sold shall be considered as delivered, when it is placed in the hands and possession of the vendee.
When the sale should be made by means of a public instrument, the execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract, if in said instrument the contrary does not appear or may be clearly inferred.
It is true that the deed of sale Exhibit A remained in possession of the vendee Cruzado, but the sale is not to be considered as
consummated by this because the said vendee never entered into possession of the land and neither did his son the plaintiff. The latter,
moreover, was unable to prove that at any time as owner of the land he collected the fruits harvested thereon, or that any other person
cultivated the said land in the name and representation of his deceased father or of the plaintiff himself. The fiction created by means of
the execution and delivery of a public instrument produces no effect if the person acquiring it never takes possession of the thing sold
or acquired, as happened in the case at bar.
If, as prescribed by the preinserted article 1095, the creditor, and in the present case the vendee, does not acquire a prope rty right in
the land purchased until the property has been delivered to him or he has taken possession of it, it is unquestionable that, as neither the
plaintiff nor his predecessor in interest took possession of the land in litigation, neither of them acquired any property right therein and,
consequently, could not and cannot now bring an action for recovery of possession which arises out of a property right in a thing which
belongs to them and not a mere right productive of a personal obligation. The plaintiff Santiago Cruzado could only, in a pro per case,
exercise the personal right of action flowing from the right possessed by his father to compel the vendor to fulfill the contract made in a
public instrument to deliver the land sold or to give him possession of it, in consequence of the said contract, though simulated and
executed for the sole purpose that the deceased Cruzado in default of P700 in cash might appear to own real estate with which to
insure the proper performance of his duties as procurador, an office he then desired to hold.
The supreme court of Spain in a decision of cassation of June 1, 1990, established the following doctrine:
That articles 1258 and 1450 of the Civil Code and the decisions of cassation of June 30, 1854, April 13 and December 13, 1861, June
30, 1864, and April 19 and December 15, 1865, do not warrant the conclusion that whoever purchases personal or real property may
exercise with respect thereto all rights of action inherent in its ownership, without it having, in some way or another, been placed at his
disposal. On the contrary, the distinction between the perfecting and the consummation of a contract marks the diversity of relations of
the contracting parties among themselves and of the owner with respect to what constitutes this property.
This principle is in harmony with those set up by the same high tribunal in its decision of January 19, 1898, and March 8, 1901.
In this last decision, also rendered on an appeal in cassation, the doctrine enunciated in the excerpt copied here below was
established:
That the contract of purchase and sale, as consensual, is perfected by consent as to the price and the thing and is consummated by the
reciprocal delivery of the one and the other, the full ownership of the thing sold being conveyed to the vendee, from which moment the
rights of action derived from this right may be exercised.

It is, then, of the utmost importance to examine whether in the said sale the purchase price was paid and whether the vendee took
possession of the land supposed to have been sold.
The record discloses that Cruzado during his lifetime was, before he became a procurador, an official escribiente or clerk charged with
the duty of coursing records and proceedings in the Court of Pampanga; that his salary was hardly sufficient to maintain him and his
family; that on account of the insufficiency of his monthly stipend, he was frequently obliged to borrow money from his friends,
notwithstanding that he with his family lodged in the house of Bernardino Dizon, the husband of the vendor Bustos, situated in the
municipality of Bacolor, with whom Cruzado maintained intimate relations of friendship, and on this account the said couple were
content to live in a country house they owned on one of their rice fields. Such was the testimony of several witnesses who lived in that
municipality, and who knew and had considerable dealings with the plaintiff's father for many years. It was the opinion of these
witnesses that the deceased Agapito G. Cruzado was a poor man, for the reason that his monthly salary scarcely provided for the
needs of himself and his family, and they therefore believed that he could not have furnished the sum of P2,200 to purchase the land in
question, and, furthermore, if the plaintiff's father had possessed this sum, he would have made the deposit of the sum of P700, the
amount of security required by the Presidencia of the former Real Audiencia de Manila for his appointment as procurador, since, having
the means, he would have preferred to deposit this smaller sum rather than to have used P2,200 in acquiring a piece of land from which
he would derive no benefit whatever, as in fact he never did, as he must have known that in spite of the simulated sale of the property
its owner would continue in its possession and would cultivate it, as she did do until her death. It is, therefore, unquestionable that the
price of the sale was not paid, an omission which would indicate that it was in effect simulated.
Aside from the fact that the spouses Estafania Bustos and Bernardino Dizon had no need to sell the said 65 balitas of land, o r of
fencing or separating this parcel from the large tract of land that belonged to them and of which it formed a part, for the reason that they
were rich and at that time were not in need of money to cultivate their extensive landholdings, it is also to be noted that t he portion of
land sold was worth very much more than the P2,200 which, in the said instrument, purported to be its price.
In addition to the foregoing, the proceedings in the case at bar furnish ample proof that Agapito Geronimo Cruzado during his lifetime
stated to various persons that he succeeded in giving bond for his appointment as procurador by means of the said instrument of
simulated sale, executed in his favor by the spouses Dizon and Bustos, as he did not have the money to make the deposit required for
his appointment. So close were the relations that then existed between the Cruzado family and that of Dizon and Bustos, that later on
the plaintiff married a daughter of these latter; hence, plaintiff, in the beginning of his letters Exhibits 8 and 9 addressed to Natalio
Dizon, a son of the vendor Estefania Bustos, calls his correspondent his "dear and esteemed brother-in-law." It is therefore not stranger
that these spouses should have wished to help plaintiff's predecessor in interest by assisting him to obtain the office of procurador,
even to the extent of making a feigned sale.
However, years afterwards, prompted by an intuition of possible future difficulties, Dizon and his wife Bustos went to the office of
Agapito G. Cruzado and required him to cancel the said deed of sale, in order to avoid any lawsuit after their death. Cruzado promised
to look for money wherewith to substitute the mortgage bond. This demand had to be repeated several times, because Cruzado did not
cancel the deed as he promised.
Furthermore, it is shown that the instrument Exhibit A is merely a second copy obtained by the plaintiff from the chief of division of
archives, without prior summons or notification of the vendor Estefania Bustos, who was still living, in conformity with the provisions
contained in article 18 of the Notarial Law of February 15, 1889, and without the plaintiff's having explained what became of the first
copy. Besides, the clerk and notary who certified that instrument did not attest therein that in his presence the vendee Cruzado paid
over the sum of P2,200, the price of the land sold, and as the vendor denied having received this sum, the obligation devolved upon
plaintiff to prove that his deceased father had paid the price stated in that instrument. By this not having done so, his omission
constitutes additional proof that the sale of the land, the recovery of possession of which plaintiff now seeks, was really simulated.
The supreme court of Spain, in a decision dated February 20, 1899, rendered on an appeal in cassation, laid down the doctrine that, in
accordance with the provisions of article 40 of the Mortgage Law, in the alienation of real property it is understood that no price has
been paid if the notary does not attest its delivery or the contracting parties do not prove that it was previously paid.
The courts are allowed full latitude to accept the presumption that the purchase price has not been paid when the notary before whom
the instrument was executed does not attest the delivery of the money, and when, such delivery being denied by one of the contracting
parties, the other does not adduce proof of its payment, especially when such presumption is corroborated by other circumstantial
evidence which, all together, undoubtedly prove that the sale was feigned and simulated for certain purposes sought to be attained by
the parties, though, as in the case at bar, the simulation was not effected in fraud of creditors.
Besides the failure to pay the purchase price, the record discloses another very important fact, to wit, that neither the vendee nor his
heirs, among these latter, the plaintiff, had at any time taken possession of the land which in the said instrument Exhibit A appeared to
have been sold, for, by the testimony of seven competent witnesses examined at the trial it is decisively and conclusively proven that
the alleged vendor, Estefania Bustos, and her husband while he was living, notwithstanding the said alienation, continued to possess
the said land supposedly sold to plaintiff's father, and cultivated it, as she had done long before the sale of September, 1875, and
continued to do so up to the date of the complaint filed by Santiago Cruzado; in the first period, until September 10, 1891, as the owner
of the land, and from this date, when the whole of the large tract of land of which the said portion apparently sold forms a part was sold
to the other defendant Manuel Escaler, the original owner Estefania Bustos continued in the material possession of the land, but now as
the lessee of the new owner, until 1908, when she was substituted by Marcelo Rodriguez as the new lessee of the property. The
plaintiff at no time after his father's death occupied the land in litigation, notwithstanding his allegation that he has been collecting
rentals from Estefania Bustos, his mother-in-law, by reason of his having leased the land to her.
The plaintiff endeavored to prove that during the years 1882 and 1883 he personally took charge of and tilled the disputed land on
shares through his tenants named Florentino de los Reyes, Lino Cortes, Macario de los Reyes and Regino de los Reyes, all of whom
corroborated plaintiff's testimony in this regard. However, six of the defendants' witnesses positively stated that they never were aware
that the said tenants had worked on the land in question during either the said two years or in any other, for these latter were working
on the adjacent lands belonging to other owners. Pablo Angeles, one of the defendants' witnesses, testified that Regino and Florentino
de los Reyes were his tenants on shares and were employed on his land adjoining that in question. He was positively certain that they
never worked on the disputed land during or about the years aforementioned, because the carabaos used by his said two tenants
belonged to him and he never would have permitted them to use these animals in working land that did not belong to him. He added
that Regino's children, Macario and Basilio, were at that time so young, being about eight years of age, that they were not yet able to
work in the fields.
The plaintiff must have been well convinced that he had no right whatever in the land supposedly purchased by his father. The latter
never demanded its possession from its owner Estefania Bustos and never thought of declaring the property as belonging to him, for
the purposes of the land tax, from the time this tax was established in this country, notwithstanding that the plaintiff, knowing his

obligation, filed a sworn declaration relative to a lot he owned in the municipality of Bacolor. This procedure of plaintiff's proves that he
did not believe himself to be the owner of the land he claims and which its present owner Manuel Escaler has constantly decla red for
the purpose of assessment.
Moreover, about the middle of the year 1891, the plaintiff Santiago Cruzado begged his brother-in-law Natalio Dizon to tell the latter's
mother, plaintiff's mother-in-law, that Cruzado desired the lease four balitas of the land in question, and some days afterwards, possibly
because he received no reply from his said brother-in-law, he addressed a letter to Dizon (Exhibit 9, page 152 of the record, translated
on page 154) in which he repeated his request and asked for a reply; but notwithstanding that his brother-in-law Dizon told him that he
could not dispose of any part of the said land for the reason that his mother Estefania Bustos was negotiating for the sale of all the land
she possessed in the sitio of Sicat to Manuel Escaler, plaintiff went to Dizon's house on an occasion when Paulino de la Cruz was
there. Cruz was a representative of Escaler and had been charged to inform himself of the situation, condition and quality of the land
which Bustos was about to sell to his principal and was at the said house for the purpose of being shown the land offered for sale. On
this occasion plaintiff learned that negotiations were being made for the sale of all the land owned by Estefania Bustos of which the 65
balitas in litigation formed a part. Plaintiff did not then or afterwards make any statement or objection whatever in defense of his rights
and interest, if he really believed that he was entitled to the land shown in the instrument Exhibit A to have been purchased by his
father.
Plaintiff made no protest whatsoever, because he well knew that the said sale was simulated and that his father had acquired no right
whatever in the property; he was therefore anxious to lease four balitas of the same land, a purpose in which he was unsuccessful
because a deal was then already going forward for the sale of the said land to its present owner, Manuel Escaler, who in fact did but it
on September 10, 1891. If plaintiff were convinced that he was the owner of the land, as he rashly asserted that he was in his complaint
for recovery of possession, it is not understood why about the middle of the year 1891 he wished to lease, not all the 65 balitas, but only
four of them, as stated in his said letter, Exhibit 9.
From that time the new owner Manuel Escaler took possession of all the land sold by Estefania Bustos, including the 65 balitas in
litigation, and continued in its possession as the owner thereof until October 8, 1910, when plaintiff filed his claim. Thus, more than the
ten years required by law for ordinary prescription had already elapsed, as Escaler purchased the land and was holding it in good faith
under a lawful title and was not disturbed in his continuous and peaceable possession, one that was adverse to the whole world. It is
therefore unquestionable that he has absolutely acquired by prescription the ownership of the disputed land, and the action brought by
plaintiff, founded solely on a simulated sale executed by the original owner of the land, not to the prejudice, but to the benefit, of the
pretended vendee, cannot prevail against Escaler's rights.
The registration obtained by the plaintiff in the property registry of the second copy of the said instrument Exhibit A, about two months
before filing his action for recovery, to wit, on August 23, 1910, has not improved the deed of sale nor made it more effective, nor could
it affect the rights held by the original owner and the present proprietor of the land in question, inasmuch as their predecessor in
interest, by default of payment of the price of the sale and on account of his never having taken possession of the land sold, was not
the owner thereof, nor did he acquire any property right whatever therein. Consequently at his death he could not have transm itted to
the plaintiff as his successor any greater right than a personal right to exact the fulfillment of a contract, and as plaintiff was not the
owner of the land, he could not validly register it.
Article 1473 of the Civil Code prescribes:
If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken
possession thereof in good faith, if it should be personal property.
Should it be real property, it shall belong to the person acquiring it who first recorded it in the registry.
Should there be no entry, the property shall belong to the person who first took possession of it in good faith, and, in the absence
thereof, to the person who presents the oldest title, provided there is good faith.
On the sale of the land to the defendant Escaler, neither he nor the plaintiff had had it entered in the property registry, but the said new
owner, Escaler, took possession of the land on the date of its acquisition, September 10,1891, and has retained possession thereof up
to the present time. So that when plaintiff registered the land he was not in possession thereof and no longer had any right whatever
therein, because it already belonged to the defendant Escaler, its lawful owner.
However, even though it were proper for plaintiff to bring the real action for recovery derived, though we do not admit that it could be,
from the simulated sale before mentioned, both this action as well as the personal action the only one available in a proper case, as
before demonstrated, pursuant to the provisions of article 1095 of the Civil Code have both certainly prescribed, for the reason that
the periods fixed by law for filing such actions have much more than elapsed.
Article 1939 of the Civil Code says:
Prescription, which began to run before the publication of this code, shall be governed by the prior laws; but if, after this code became
operative, all the time required in the same for prescription has elapsed, it shall be effectual, even if according to said prior laws a
longer period of time may be required.
Personal actions prescribe after ten years; and the same with the writ of execution therein issued, after twenty years; while real actions
prescribe after thirty years: according to Law 5, Title 8, Book 1 of the Novisima Recopilacion, and Law 21, Title 29, Partida 3, which
were those in force on the date of the execution of the deed of sale, Exhibit A.
From September 7, 1875, to October 8, 1910, when the complaint was filed, thirty-five years have elapsed. Therefore, not only in
accordance with the laws aforecited, but also pursuant to the provisions of articles 1963 and 1964 of the Civil Code, the periods fixed
for the prescription of the personal action which could, in a proper case, have been exercised, as well as for the real action for recovery
of possession brought by the plaintiff without right so to do, have more than prescribed.
For all the foregoing reasons, whereby the errors assigned to the judgment appealed from have been duly refuted, the said judgment
should be, as it is hereby, affirmed, with the costs against the appellant. So ordered.
Arellano, C. J., Johnson, Carson, Moreland, Trent, and Araullo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21601

December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,

vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
W. H. Quasha and Associates for plaintiff-appellant.
Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.
ZALDIVAR, J.:
On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance of Manila to recover certain sums
of money representing damages allegedly suffered by the former in view of the refusal of the latter to comply with the terms of a
management contract entered into between them on January 30, 1937, including attorney's fees and costs.
Defendant in its answer denied the material allegations of the complaint and set up certain special defenses, among them, prescription
and laches, as bars against the institution of the present action.
After trial, during which the parties presented testimonial and numerous documentary evidence, the court a quo rendered a decision
dismissing the complaint with costs. The court stated that it did not find sufficient evidence to establish defendant's counterclaim and so
it likewise dismissed the same.
The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in the case.
The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of this decision:
It appears that the suit involves an operating agreement executed before World War II between the plaintiff and the defendant whereby
the former operated and managed the mining properties owned by the latter for a management fee of P2,500.00 a month and a 10%
participation in the net profits resulting from the operation of the mining properties. For brevity and convenience, hereafter the plaintiff
shall be referred to as NIELSON and the defendant, LEPANTO.
The antecedents of the case are: The contract in question (Exhibit `C') was made by the parties on January 30, 1937 for a period of five
(5) years. In the latter part of 1941, the parties agreed to renew the contract for another period of five (5) years, but in the meantime, the
Pacific War broke out in December, 1941.
In January, 1942 operation of the mining properties was disrupted on account of the war. In February of 1942, the mill, power plant,
supplies on hand, equipment, concentrates on hand and mines, were destroyed upon orders of the United States Army, to prevent their
utilization by the invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated the mines during
the continuance of the war, and who were ousted from the mining properties only in August of 1945.
After the mining properties were liberated from the Japanese forces, LEPANTO took possession thereof and embarked in rebuilding
and reconstructing the mines and mill; setting up new organization; clearing the mill site; repairing the mines; erecting staff quarters and
bodegas and repairing existing structures; installing new machinery and equipment; repairing roads and maintaining the same;
salvaging equipment and storing the same within the bodegas; doing police work necessary to take care of the materials and
equipment recovered; repairing and renewing the water system; and remembering (Exhibits "D" and "E"). The rehabilitation and
reconstruction of the mine and mill was not completed until 1948 (Exhibit "F"). On June 26, 1948 the mines resumed operation under
the exclusive management of LEPANTO (Exhibit "F-l").
Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and LEPANTO
over the status of the operating contract in question which as renewed expired in 1947. Under the terms thereof, the management
contract shall remain in suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely affects the work
of mining and milling.
"In the event of inundations, floodings of mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion,
organized strike, riot, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of this
Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability." (Clause II of Exhibit "C").
NIELSON held the view that, on account of the war, the contract was suspended during the war; hence the life of the contract should be
considered extended for such time of the period of suspension. On the other hand, LEPANTO contended that the contract should
expire in 1947 as originally agreed upon because the period of suspension accorded by virtue of the war did not operate to extend
further the life of the contract.
No understanding appeared from the record to have been bad by the parties to resolve the disagreement. In the meantime, LEPANTO
rebuilt and reconstructed the mines and was able to bring the property into operation only in June of 1948, . . . .
Appellant in its brief makes an alternative assignment of errors depending on whether or not the management contract basis of the
action has been extended for a period equivalent to the period of suspension. If the agreement is suspended our attention should be
focused on the first set of errors claimed to have been committed by the court a quo; but if the contrary is true, the discussion will then
be switched to the alternative set that is claimed to have been committed. We will first take up the question whether the management
agreement has been extended as a result of the supervening war, and after this question shall have been determined in the sense
sustained by appellant, then the discussion of the defense of laches and prescription will follow as a consequence.
The pertinent portion of the management contract (Exh. C) which refers to suspension should any event constituting force majeure
happen appears in Clause II thereof which we quote hereunder:

In the event of inundations, floodings of the mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion,
organized strike, riot, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the term s of this
Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability.
A careful scrutiny of the clause above-quoted will at once reveal that in order that the management contract may be deemed
suspended two events must take place which must be brought in a satisfactory manner to the attention of defendant within a
reasonable time, to wit: (1) the event constituting the force majeure must be reasonably beyond the control of Nielson, and (2) it must
adversely affect the work of mining and milling the company is called upon to undertake. As long as these two condition exist the
agreement is deem suspended.
Does the evidence on record show that these two conditions had existed which may justify the conclusion that the management
agreement had been suspended in the sense entertained by appellant? Let us go to the evidence.
It is a matter that this Court can take judicial notice of that war supervened in our country and that the mines in the Philippines were
either destroyed or taken over by the occupation forces with a view to their operation. The Lepanto mines were no exception for not
was the mine itself destroyed but the mill, power plant, supplies on hand, equipment and the like that were being used there were
destroyed as well. Thus, the following is what appears in the Lepanto Company Mining Report dated March 13, 1946 submitted by its
President C. A. DeWitt to the defendant:1 "In February of 1942, our mill, power plant, supplies on hand, equipment, concentrates on
hand, and mine, were destroyed upon orders of the U.S. Army to prevent their utilization by the enemy." The report also mentions the
report submitted by Mr. Blessing, an official of Nielson, that "the original mill was destroyed in 1942" and "the original power plant and
all the installed equipment were destroyed in 1942." It is then undeniable that beginning February, 1942 the operation of the Lepanto
mines stopped or became suspended as a result of the destruction of the mill, power plant and other important equipment necessary for
such operation in view of a cause which was clearly beyond the control of Nielson and that as a consequence such destruction
adversely affected the work of mining and milling which the latter was called upon to undertake under the management contract.
Consequently, by virtue of the very terms of said contract the same may be deemed suspended from February, 1942 and as of that
month the contract still had 60 months to go.
On the other hand, the record shows that the defendant admitted that the occupation forces operated its mining properties subject of
the management contract,2 and from the very report submitted by President DeWitt it appears that the date of the liberation of the mine
was August 1, 1945 although at the time there were still many booby traps.3 Similarly, in a report submitted by the defendant to its
stockholders dated August 25, 1948, the following appears: "Your Directors take pleasure in reporting that June 26, 1948 marked the
official return to operations of this Company of its properties in Mankayan, Mountain Province, Philippines."4
It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945, but because of the period of
rehabilitation and reconstruction that had to be made as a result of the destruction of the mill, power plant and other necessary
equipment for its operation it cannot be said that the suspension of the contract ended on that date. Hence, the contract must still be
deemed suspended during the succeeding years of reconstruction and rehabilitation, and this period can only be said to have ended on
June 26, 1948 when, as reported by the defendant, the company officially resumed the mining operations of the Lepanto. It should here
be stated that this period of suspension from February, 1942 to June 26, 1948 is the one urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the part of Nielson had been suspended during the period set out
above within the purview of the management contract, the next question that needs to be determined is the effect of such suspension.
Stated in another way, the question now to be determined is whether such suspension had the effect of extending the period of the
management contract for the period of said suspension. To elucidate this matter, we again need to resort to the evidence.
For appellant Nielson two witnesses testified, declaring that the suspension had the effect of extending the period of the contract,
namely, George T. Scholey and Mark Nestle. Scholey was a mining engineer since 1929, an incorporator, general manager and
director of Nielson and Company; and for some time he was also the vice-president and director of the Lepanto Company during the
pre-war days and, as such, he was an officer of both appellant and appellee companies. As vice-president of Lepanto and general
manager of Nielson, Scholey participated in the negotiation of the management contract to the extent that he initialed the same both as
witness and as an officer of both corporations. This witness testified in this case to the effect that the standard force majeure clause
embodied in the management contract was taken from similar mining contracts regarding mining operations and the understanding
regarding the nature and effect of said clause was that when there is suspension of the operation that suspension meant the extension
of the contract. Thus, to the question, "Before the war, what was the understanding of the people in the particular trend of business with
respect to the force majeure clause?", Scholey answered: "That was our understanding that the suspension meant the extension of
time lost."6
Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson since 1937 until the time he took the
witness stand and had been a director, manager, and president of the same company. When he was propounded the question: "Do you
know what was the custom or usage at that time in connection with force majeure clause?", Nestle answered, "In the mining world the
force majeure clause is generally considered. When a calamity comes up and stops the work like in war, flood, inundation or fire, etc.,
the work is suspended for the duration of the calamity, and the period of the contract is extended after the calamity is over to enable the
person to do the big work or recover his money which he has invested, or accomplish what his obligation is to a third person ."7
And the above testimonial evidence finds support in the very minutes of the special meeting of the Board of Directors of the Lepanto
Company issued on March 10, 1945 which was then chairmaned by Atty. C. A. DeWitt. We read the following from said report:
The Chairman also stated that the contract with Nielson and Company would soon expire if the obligations were not suspended, in
which case we should have to pay them the retaining fee of P2,500.00 a month. He believes however, that there is a provision in the
contract suspending the effects thereof in cases like the present, and that even if it were not there, the law itself would s uspend the
operations of the contract on account of the war. Anyhow, he stated, we shall have no difficulty in solving satisfactorily any problem we
may have with Nielson and Company.8
Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was the chairman of the Board of
Directors of the Lepanto Company, the management contract would then expire unless the period therein rated is suspended but that,
however, he expressed the belief that the period was extended because of the provision contained therein suspending the effects
thereof should any of the case of force majeure happen like in the present case, and that even if such provision did not exist the law
would have the effect of suspending it on account of the war. In substance, Atty. DeWitt expressed the opinion that as a result of the
suspension of the mining operation because of the effects of the war the period of the contract had been extended.
Contrary to what appellant's evidence reflects insofar as the interpretation of the force majeure clause is concerned, however, appellee
gives Us an opposite interpretation invoking in support thereof not only a letter Atty. DeWitt sent to Nielson on October 20, 1945,9

wherein he expressed for the first time an opinion contrary to what he reported to the Board of Directors of Lepanto Company as stated
in the portion of the minutes of its Board of Directors as quoted above, but also the ruling laid down by our Supreme Court i n some
cases decided sometime ago, to the effect that the war does not have the effect of extending the term of a contract that the parties may
enter into regarding a particular transaction, citing in this connection the cases of Victorias Planters Association v. Victorias Milling
Company, 51 O.G. 4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young Chong Co. v.
Court of Appeals, et al., 81 Phil. 601.
To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or usage in mining contract that
appellant's witnesses tried to introduce was incompetent because (a) said custom was not specifically pleaded; (b) Lepanto made
timely and repeated objections to the introduction of said evidence; (c) Nielson failed to show the essential elements of usage which
must be shown to exist before any proof thereof can be given to affect the contract; and (d) the testimony of its witnesses cannot prevail
over the very terms of the management contract which, as a rule, is supposed to contain all the terms and conditions by which the
parties intended to be bound.
It is here necessary to analyze the contradictory evidence which the parties have presented regarding the interpretation of the force
majeure clause in the management contract.
At the outset, it should be stated that, as a rule, in the construction and interpretation of a document the intention of the parties must be
sought (Rule 130, Section 10, Rules of Court). This is the basic rule in the interpretation of contracts because all other rules are but
ancilliary to the ascertainment of the meaning intended by the parties. And once this intention has been ascertained it becomes an
integral part of the contract as though it had been originally expressed therein in unequivocal terms (Shoreline Oil Corp. v. Guy, App.
189, So., 348, cited in 17A C.J.S., p. 47). How is this intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in relation to the transaction under
consideration (Article 1371, Civil Code). In this particular case, it is worthy of note what Atty. C. A. DeWitt has stated in the special
meeting of the Board of Directors of Lepanto in the portion of the minutes already quoted above wherein, as already stated, he
expressed the opinion that the life of the contract, if not extended, would last only until January, 1947 and yet he said that there is a
provision in the contract that the war had the effect of suspending the agreement and that the effect of that suspension was that the
agreement would have to continue with the result that Lepanto would have to pay the monthly retaining fee of P2,500.00. And this belief
that the war suspended the agreement and that the suspension meant its extension was so firm that he went to the extent that even if
there was no provision for suspension in the agreement the law itself would suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he changed his mind because there he
stated that the contract was merely suspended, but not extended, by reason of the war, contrary to the opinion he expressed in t he
meeting of the Board of Directors already adverted to, but between the two opinions of Atty. DeWitt We are inclined to give more weight
and validity to the former not only because such was given by him against his own interest but also because it was given befo re the
Board of Directors of Lepanto and in the presence, of some Nielson officials 10 who, on that occasion were naturally led to believe that
that was the true meaning of the suspension clause, while the second opinion was merely self-serving and was given as a mere
afterthought.
Appellee also claims that the issue of true intent of the parties was not brought out in the complaint, but anent this matter suffice it to
state that in paragraph No. 19 of the complaint appellant pleaded that the contract was extended. 11 This is a sufficient all egation
considering that the rules on pleadings must as a rule be liberally construed.
It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and usage concerning the force majeure
clause, the testimony adduced by appellant is uncontradicted. If such were not true, appellee should have at least attempted to offer
contradictory evidence. This it did not do. Not even Lepanto's President, Mr. V. E. Lednicky who took the witness stand, contradicted
said evidence.
In holding that the suspension of the agreement meant the extension of the same for a period equivalent to the suspension, We do not
have the least intention of overruling the cases cited by appellee. We simply want to say that the ruling laid down in said cases does not
apply here because the material facts involved therein are not the same as those obtaining in the present. The rule of stare decisis
cannot be invoked where there is no analogy between the material facts of the decision relied upon and those of the instant case.
Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no evidence at all regarding the
intention of the parties to extend the contract equivalent to the period of suspension caused by the war. Neither was there evidence that
the parties understood the suspension to mean extension; nor was there evidence of usage and custom in the industry that the
suspension meant the extension of the agreement. All these matters, however, obtain in the instant case.
Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue referred to the interpretation of a pre-war
contract of lease of sugar cane lands and the liability of the lessee to pay rent during and immediately following the Japanese
occupation and where the defendant claimed the right of an extension of the lease to make up for the time when no cane was planted.
This Court, in holding that the years which the lessee could not use the land because of the war could not be discounted from the
period agreed upon, held that "Nowhere is there any insinuation that the defendant-lessee was to have possession of lands for seven
years excluding years on which he could not harvest sugar." Clearly, this ratio decidendi is not applicable to the case at bar wherein
there is evidence that the parties understood the "suspension clause by force majeure" to mean the extension of the period of
agreement.
Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601, appellant leased a building from
appellee beginning September 13, 1940 for three years, renewable for two years. The lessee's possession was interrupted in February,
1942 when he was ousted by the Japanese who turned the same over to German Otto Schulze, the latter occupying the same until
January, 1945 upon the arrival of the liberation forces. Appellant contended that the period during which he did not enjoy the leased
premises because of his dispossession by the Japanese had to be deducted from the period of the lease, but this was overruled by this
Court, reasoning that such dispossession was merely a simple "perturbacion de merohecho y de la cual no responde el arrendador"
under Article 1560 of the old Civil Code Art. 1664). This ruling is also not applicable in the instant case because in that case there was
no evidence of the intention of the parties that any suspension of the lease by force majeure would be understood to extend the period
of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are inapplicable because the facts therein
involved do not run parallel to those obtaining in the present case.
We shall now consider appellee's defense of laches. Appellee is correct in its contention that the defense of laches applies
independently of prescription. Laches is different from the statute of limitations. Prescription is concerned with the fact of delay,

whereas laches is concerned with the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of
permitting a claim to be enforced, this inequity being founded on some change in the condition of the property or the relation of the
parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies at law. Prescription is based on
fixed time, laches is not. (30 C.J.S., p. 522; See also Pomeroy's Equity Jurisprudence, Vol. 2, 5th ed., p. 177).
The question to determine is whether appellant Nielson is guilty of laches within the meaning contemplated by the authorities on the
matter. In the leading case of Go Chi Gun, et al. vs. Go Cho, et al., 96 Phil. 622, this Court enumerated the essential elements of laches
as follows:
(1)
conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which complaint is made
and for which the complaint seeks a remedy; (2) delay in asserting the complainant's rights, the complainant having had knowledge or
notice of the defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of knowledge or notice on the part
of the defendant that the complainant would assert the right on which he bases his suit; and (4) injury or prejudice to the defendant in
the event relief is accorded to the complainant, or the suit is not held barred.
Are these requisites present in the case at bar?
The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its management fees, its percentage
of profits and refused to allow it to resume the management operation.
Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee Lepanto has refused to permit it to
resume management and that since 1948 appellee has resumed operation of the mines and it filed its complaint only on February 6,
1958, there being apparent delay in filing the present action, We find the delay justified and as such cannot constitute laches. It appears
that appellant had not abandoned its right to operate the mines for even before the termination of the suspension of the agreement as
early as January 20, 194612 and even before March 10, 1945, it already claimed its right to the extension of the contract,13 and it
pressed its claim for the balance of its share in the profits from the 1941 operation14 by reason of which negotiations had taken place
for the settlement of the claim15 and it was only on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a
period of less than one year that had elapsed from the date of the final denial of the claim to the date of the filing of the complaint, which
certainly cannot be considered as unreasonable delay.
The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not know that appellant would assert its
rights on which it based suit. The evidence shows that Nielson had been claiming for some time its rights under the contract, as already
shown above.
Neither is the fourth element present, for if there has been some delay in bringing the case to court it was mainly due to the attempts at
arbitration and negotiation made by both parties. If Lepanto's documents were lost, it was not caused by the delay of the filing of the
suit but because of the war.
Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of the complaint in the present case
was the inevitable of the protracted negotiations between the parties concerning the settlement of their differences. It appears that
Nielson asked for arbitration16 which was granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was appointed to
act on said differences but Mr. DeWitt always tried to evade the issue17 until he was taken ill and died. Mr. Farnell offered to Nielson
the sum of P13,000.58 by way of compromise of all its claim arising from the management contract18 but apparently the offer was
refused. Negotiations continued with the exchange of letters between the parties but with no satisfactory result.19 It can be said that the
delay due to protracted negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to take advantage of such
delay or to question the propriety of the action taken by Nielson. The defense of laches is an equitable one and equity should be
applied with an even hand. A person will not be permitted to take advantage of, or to question the validity, or propriety of, any act or
omission of another which was committed or omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs. United
States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry Prentiss & Co., 288 U.S. 73, 77 L. Ed., 626, 53 S. Ct., 283).
Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already barred by the statute of l imitations, and
that ruling is now assailed by the appellant in this appeal. In urging that the court a quo erred in reaching that conclusion the appellant
has discussed the issue with reference to particular claims.
The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee Lepanto alleges that the correct
basis of the computation of the sharing in the net profits shall be as provided for in Clause V of the Management Contract, while
appellant Nielson maintains that the basis should be what is contained in the minutes of the special meeting of the Board of Directors of
Lepanto on August 21, 1940, this question must first be elucidated before the main issue is discussed.
The facts relative to the matter of profit sharing follow: In the management contract entered into between the parties on January 30,
1937, which was renewed for another five years, it was stipulated that Nielson would receive a compensation of P2,500.00 a mo nth
plus 10% of the net profits from the operation of the properties for the preceding month. In 1940, a dispute arose regarding the
computation of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract
was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the pertinent provision of the contract
effective January 1, 1940 in such a way that Nielson shall receive (1) 10% of the dividends declared and paid, when and as paid, during
the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount
expended during the year out of surplus earnings for capital account. 20 Counsel for the appellee admitted during the trial that the
extract of the minutes as found in Exhibit B is a faithful copy from the original. 21 Mr. George Scholey testified that the foregoing
modification was agreed upon. 22
Lepanto claims that this new basis of computation should be rejected (1) because the contract was clear on the point of the 10% share
and it was so alleged by Nielson in its complaint, and (2) the minutes of the special meeting held on August 21, 1940 was not signed.
It appearing that the issue concerning the sharing of the profits had been raised in appellant's complaint and evidence on the matter
was introduced 23 the same can be taken into account even if no amendment of the pleading to make it conform to the evidence has
been made, for the same is authorized by Section 4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new Rules of
Court).
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that the period to be c onsidered
for the prescription of the claim regarding participation in the profits is only four years, because the modification of the sharing
embodied in the management contract is merely verbal, no written document to that effect having been presented. This contention is
untenable. The modification appears in the minutes of the special meeting of the Board of Directors of Lepanto held on August 21,
1940, it having been made upon the authority of its President, and in said minutes the terms of the modification had been specified.

This is sufficient to have the agreement considered, for the purpose of applying the statute of limitations, as a written contract even if
the minutes were not signed by the parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if
adopted by two persons may constitute a contract in writing even if the same is not signed by either of the parties (3 A.L.R., 2d, pp.
812-813). Another authority says that an unsigned agreement the terms of which are embodied in a document unconditionally accepted
by both parties is a written contract (Corbin on Contracts, Vol. 1, p. 85)
The modification, therefore, made in the management contract relative to the participation in the profits by appellant, as contained in the
minutes of the special meeting of the Board of Directors of Lepanto held on August 21, 1940, should be considered as a written
contract insofar as the application of the statutes of limitations is concerned. Hence, the action thereon prescribes within ten (10) years
pursuant to Section 43 of Act 190.
Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941 operations accrued on December 21,
1941 and the right to commence an action thereon began on January 1, 1942 so that the action must be brought within ten (10) years
from the latter date. It is true that the complaint was filed only on February 6, 1958, that is sixteen (16) years, one (1) month and five (5)
days after the right of action accrued, but the action has not yet prescribed for various reasons which We will hereafter discuss.
The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim for money. Said claim accrued on
December 31, 1941, and Lepanto is a war sufferer. Hence the claim was covered by Executive Order No. 32 of March 10, 1945. It is
well settled that the operation of the Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs.
Aquino, G.R. No. L-10274, February 27, 1957).
This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months and eight (8) days (Tioseco vs. Day,
et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487, April 29, 1960), and deducting this period from the time that had
elapsed since the accrual of the right of action to the date of the filing of the complaint, the extent of which is sixteen (16) years, one (1)
month and five (5) days, we would have less than eight (8) years to be counted for purposes of prescription. Hence appellant's action
on its claim of 10% on the 1941 profits had not yet prescribed.
Another reason that may be taken into account in support of the no-bar theory of appellant is the arbitration clause embodied in the
management contract which requires that any disagreement as to any amount of profits before an action may be taken to court shall be
subject to arbitration. 24 This agreement to arbitrate is valid and binding. 25 It cannot be ignored by Lepanto. Hence Nielson could not
bring an action on its participation in the 1941 operations-profits until the condition relative to arbitration had been first complied with. 26
The evidence shows that an arbitration committee was constituted but it failed to accomplish its purpose on June 25, 1957. 27 From
this date to the filing of the complaint the required period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest, amounting to P17,500.00; (2) 10%
in the depletion reserves for 1941; and (3) 10% in the profits for years prior to 1948 amounting to P19,764.70.
With regard to the first claim, the Lepanto's report for the calendar year of 1954 28 shows that it declared a 10% cash dividend in
December, 1941, the amount of which is P175,000.00. The evidence in this connection (Exhibits L and O) was admitted without
objection by counsel for Lepanto. 29 Nielson claims 10% share in said amount with interest thereon at 6% per annum. The docum ent
(Exhibit L) was even recognized by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on the provision of paragraph V
of the management contract as modified pursuant to the proposal of Lepanto at the special meeting of the Board of Directors on August
21, 1940 (Exh. B), whereby it was provided that Nielson would be entitled to 10% of any dividends to be declared and paid during the
period of the contract.
With regard to the second claim, Nielson admits that there is no evidence regarding the amount set aside by Lepanto for depletion
reserve for 1941 31 and so the 10% participation claimed thereon cannot be assessed.
Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which appears in Lepanto's annual report
for 1948 32 and entered as profit for prior years in the statement of income and surplus, which amount consisted "almost in its entirety
of proceeds of copper concentrates shipped to the United States during 1947," this claim should to denied because the amount is not
"dividend declared and paid" within the purview of the management contract.
The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to pay its management fees for
January, 1942, and for the full period of extension amounting to P150,000.00, or P2,500.00 a month for sixty (60) months, a total of
P152,500.00 with interest thereon from the date of judicial demand.
It is true that the claim of management fee for January, 1942 was not among the causes of action in the complaint, but inasmuch as the
contract was suspended in February, 1942 and the management fees asked for included that of January, 1942, the fact that such claim
was not included in a specific manner in the complaint is of no moment because an appellate court may treat the pleading as amended
to conform to the evidence where the facts show that the plaintiff is entitled to relief other than what is asked for in the complaint
(Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that the last payment made by Lepanto for management fee was for November
and December, 1941. 33 If, as We have declared, the management contract was suspended beginning February 1942, it follows that
Nielson is entitled to the management fee for January, 1942.
Let us now come to the management fees claimed by Nielson for the period of extension. In this respect, it has been shown that the
management contract was extended from June 27, 1948 to June 26, 1953, or for a period of sixty (60) months. During this period
Nielson had a right to continue in the management of the mining properties of Lepanto and Lepanto was under obligation to let Nielson
do it and to pay the corresponding management fees. Appellant Nielson insisted in performing its part of the contract but Lepanto
prevented it from doing so. Hence, by virtue of Article 1186 of the Civil Code, there was a constructive fulfillment an the part of Nielson
of its obligation to manage said mining properties in accordance with the contract and Lepanto had the reciprocal obligation to pay the
corresponding management fees and other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson) to continue in
the management of the mines during the extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the mining properties soon after
liberation. In the report 34 of Lepanto, submitted to its stockholders for the period from 1941 to March 13, 1946, are stated the activities
of Nielson's officials in relation to Nielson's insistence in continuing the management. This report was admitted in evidence without
objection. We find the following in the report:
Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await the liberation of the mines. (Mr.
Blessing was the Treasurer and Metallurgist of Nielson). Blessing with Clark and Stanford went to the property on July 16 and found
that while the mill site had been cleared of the enemy the latter was still holding the area around the staff houses and putting up a
strong defense. As a result, they returned to San Fernando and later went back to the mines on July 26. Mr. Blessing made the report,

dated August 6, recommending a program of operation. Mr. Nielson himself spent a day in the mine early in December, 1945 and
reiterated the program which Mr. Blessing had outlined. Two or three weeks before the date of the report, Mr. Coldren of the Nielson
organization also visited the mine and told President C. A. DeWitt of Lepanto that he thought that the mine could be put in condition for
the delivery of the ore within ten (10) days. And according to Mark Nestle, a witness of appellant, Nielson had several men including
engineers to do the job in the mines and to resume the work. These engineers were in fact sent to the mine site and submitted reports
of what they had done. 35
On the other hand, appellee claims that Nielson was not ready and able to resume the work in the mines, relying mainly on the
testimony of Dr. Juan Nabong, former secretary of both Nielson and Lepanto, given in the separate case of Nancy Irving Romero vs.
Lepanto Consolidated Mining Company (Civil Case No. 652, CFI, Baguio), to the effect that as far as he knew "Nielson and Company
had not attempted to operate the Lepanto Consolidated Mining Company because Mr. Nielson was not here in the Philippines after the
last war. He came back later," and that Nielson and Company had no money nor stocks with which to start the operation. He was asked
by counsel for the appellee if he had testified that way in Civil Case No. 652 of the Court of First Instance of Baguio, and he answered
that he did not confirm it fully. When this witness was asked by the same counsel whether he confirmed that testimony, he said that
when he testified in that case he was not fully aware of what happened and that after he learned more about the officials of the
corporation it was only then that he became aware that Nielson had really sent his men to the mines along with Mr. Blessing a nd that
he was aware of this fact personally. He further said that Mr. Nielson was here in 1945 and "he was going out and contacting his
people." 36
Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and operation of the mines but that it
(Lepanto) unequivocally refuse to allow it. The following is what appears in the brief of the appellee:
It was while defendant was in the midst of the rehabilitation work which was fully described earlier, still reeling under the terrible
devastation and destruction wrought by war on its mine that Nielson insisted in taking over the management and operation of the mine.
Nielson thus put Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact it did, Nielson's insistence in
taking over the management and operation because, as was obvious, it was impossible, as a result of the destruction of the mine, for
the plaintiff to manage and operate the same and because, as provided in the agreement, the contract was suspended by reason of the
war. The stand of Lepanto in disallowing Nielson to assume again the management of the mine in 1945 was unequivocal and cannot be
misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that the management contract was extended, We believe that
Nielson is entitled to the management fees for the period of extension. Nielson should be awarded on this claim sixty times its monthly
pay of P2,500.00, or a total of P150,000.00.
In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to pay it (Nielson) the 10% share in
the profits of operation realized during the period of five (5) years from the resumption of its post-war operations of the Mankayan
mines, in the total sum of P2,403,053.20 with interest thereon at the rate of 6% per annum from February 6, 1958 until full payment. 38
The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends; (3) depletion reserves; and (4)
amount expended on capital investment.
Anent the first category, Lepanto's report for the calendar year 1954 39 contains a record of the cash dividends it paid up to the date of
said report, and the post-war dividends paid by it corresponding to the years included in the period of extension of the management
contract are as follows:

POST-WAR
8

10%

November

1949

P 200,000.00

10%

July

1950

300,000.00

10

10%

October

1950

500,000.00

11

20%

December

1950

1,000,000.00

12

20%

March

1951

1,000,000.00

13

20%

June

1951

1,000,000.00

14

20%

September

1951

1,000,000.00

15

40%

December

1951

2,000,000.00

16

20%

March

1952

1,000,000.00

17

20%

May

1952

1,000,000.00

18

20%

July

1952

1,000,000.00

19

20%

September

1952

1,000,000.00

20

20%

December

1952

1,000,000.00

21

20%

March

1953

1,000,000.00

22

20%

June

1953

1,000,000.00

TOTAL

P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled to 10% of the P14,000,000.00 cash dividends that
had been distributed, as stated in the above-mentioned report, or the sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during the period of extension of the contract are: On
November 28, 1949, the stock dividend declared was 50% of the outstanding authorized capital of P2,000,000.00 of the company, or
stock dividends worth P1,000,000.00; and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing authorized
capital of P3,000,000.00 of the company, or stock dividends worth P2,000,000.00. 40
Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest thereon at 6% from February 6,
1958 cannot be granted for that would not be in accordance with the management contract which entitles Nielson to 10% of any
dividends declared paid, when and as paid. Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have
accrued to said stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock worth P100,000.00,
as per stock dividends declared on November 28, 1949 and all the fruits accruing to said shares after said date; and also sha res of
stock worth P200,000.00 as per stock dividends declared on August 20, 1950 and all fruits accruing thereto after said date.
Anent the third category, the depletion reserve appearing in the statement of income and surplus submitted by Lepanto corresponding
to the years covered by the period of extension of the contract, may be itemized as follows:
In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.
In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.
In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was P84,963.30.
In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was P129,089.88.
In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was P147,141.54.
In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.
Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the whole year. Inasmuch as the
contract was extended only for the last half of the year 1948, said amount of P11,602.80 should be divided by two, and so Nielson is
only entitled to 10% of the half amounting to P5,801.40.
Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the contract was extended only until the
first half of the year, said amount of P277,493.25 should be divided by two, and so Nielson is only entitled to 10% of the half amounting
to P138,746.62. Summing up the entire depletion reserves, from the middle of 1948 to the middle of 1953, we would have a total of
P539,298.81, of which Nielson is entitled to 10%, or to the sum of P53,928.88.
Finally, with regard to the fourth category, there is no figure in the record representing the value of the fixed assets as of the beginning
of the period of extension on June 27, 1948. It is possible, however, to arrive at the amount needed by adding to the value of the fixed
assets as of December 31, 1947 one-half of the amount spent for capital account in the year 1948. As of December 31, 1947, the value
of the fixed assets was P1,061,878.88 41 and as of December 31, 1948, the value of the fixed assets was P3,270,408.07. 42 Hen ce,
the increase in the value of the fixed assets for the year 1948 was P2,208,529.19, one-half of which is P1,104,264.59, which amount
represents the expenses for capital account for the first half of the year 1948. If to this amount we add the fixed assets as of December
31, 1947 amounting to P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed assets at the beginning of
the second half of the year 1948.
There is also no figure representing the value of the fixed assets when the contract, as extended, ended on June 26, 1953; but this may
be computed by getting one-half of the expenses for capital account made in 1953 and adding the same to the value of the fixed assets
as of December 31, 1953 is P9,755,840.41 43 which the value of the fixed assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is P646,049.34 which would represent the expenses for capital account up to
June, 1953. This amount added to the value of the fixed assets as of December 31, 1952 would give a total of P9,109,791.16 which
would be the value of fixed assets at the end of June, 1953.
The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is P6,943,647.69, which amount
represents the difference between the value of the fixed assets of Lepanto in the year 1948 and in the year 1953, as stated above. On
this amount Nielson is entitled to a share of 10% or to the amount of P694,364.76.
Considering that most of the claims of appellant have been entertained, as pointed out in this decision, We believe that appellant is
entitled to be awarded attorney's fees, especially when, according to the undisputed testimony of Mr. Mark Nestle, Nielson obliged
himself to pay attorney's fees in connection with the institution of the present case. In this respect, We believe, considering the intricate
nature of the case, an award of fifty thousand (P50,000.00) pesos for attorney's fees would be reasonable.
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and enter in lieu thereof
another, ordering the appellee Lepanto to pay appellant Nielson the different amounts as specified hereinbelow:
(1)
10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest thereon from the date of the
filing of the complaint;
(2)
management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the date of the filing of the
complaint;
(3)
management fees for the sixty-month period of extension of the management contract, amounting to P150,000.00, with legal
interest from the date of the filing of the complaint;
(4)
10% share in the cash dividends during the period of extension of the management contract, amounting to P1,400,000.00,
with legal interest thereon from the date of the filing of the complaint;
(5)
10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with legal interest thereon from
the date of the filing of the complaint;

(6)
10% of the expenses for capital account during the period of extension, amounting to P694,364.76, with legal interest thereon
from the date of the filing of the complaint;
(7)
to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co. at par value equivalent to the
total of Nielson's l0% share in the stock dividends declared on November 28, 1949 and August 22, 1950, together with all cash and
stock dividends, if any, as may have been declared and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that
accrued to said shares;
If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-appellee shall pay plaintiff-appellant an
amount in cash equivalent to the market value of said shares at the time of default (12 C.J.S., p. 130), that is, all shares of the stock
that should have been delivered to Nielson before the filing of the complaint must be paid at their market value as of the date of the
filing of the complaint; and all shares, if any, that should have been delivered after the filing of the complaint at the market value of the
shares at the time Lepanto disposed of all its available shares, for it is only then that Lepanto placed itself in condition of not being able
to perform its obligation (Article 1160, Civil Code);
(8)

the sum of P50,000.00 as attorney's fees; and

(9)

the costs. It is so ordered.

Concepcion, C.J., Regala, Makalintal, Bengzon, J.P., Sanchez and Castro, JJ., concur.
Reyes, J.B.L. and Barrera, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision 1 of the Court of
Appeals 2 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 respondent court reversed the trial court 3 which, in dismissing the
complaint for specific performance with damages and annulment of contract, 4 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, Equatorial) to have been made without any breach of or prejudice to, the said lease
contracts. 5
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 plain tiff
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 vacate the premises. 6
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 complaint. 7
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, Inc. and Equatorial Realty Development, Inc. as valid and binding upon all
the parties. 8
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. 6867).
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 parties. 9
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 noncondominium 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 subjacent land in proportion
to Mayfair's interest over the premises sold to it. 10
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 MERITS OF THE CASE IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court of Appeals.
Suffice it to say that in our Resolution, 12 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 Banc for proper disposition. 13
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 conditions thereof. 14
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.
As early as 1916, in the case of Beaumont vs. Prieto, 15 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 consideration. 16 (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 meter upon failure
to make the purchase within the time specified; 17 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 option was not supported by a distinct consideration; 18 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 consideration; 19 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 that of the other. 20 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 of Ang Yu Asuncion vs. Court of Appeals 21 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 with draw 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 applica bility 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 of the option. It must be supported by consideration. 22 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 in Vda. De Quirino vs. Palarca, 23 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 Asuncion vs. Court of Appeals. 24
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 "30-day 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 show to it the Contract of Lease in which Par. 20 is contained. 25
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 contract. 26 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 negotiate within
the 30-day stipulated period. 27
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 CA-G.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.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22604

February 3, 1925

GUADALUPE GONZALEZ and LUIS GOMEZ, plaintiffs-appellants,

vs.
E.J. HABERER, defendant-appellee.
Feria and La O for appellants.
Paredes, Buencamino and Yulo for appellee.
OSTRAND, J.:
This action is brought to recover the sum of P34,260 alleged to be due the plaintiffs from the defendant upon a written agreement for
the sale of a tract of land situated in the Province of Nueva Ecija. The plaintiffs also ask for damages in the sum of P10,000 for the
alleged failure of the defendant to comply with his part of the agreement.
The defendant in his answer admits that of the purchase price stated in the agreement a balance of P31,000 remains unpaid, but by
way of special defense, cross-complaint and counter-claim alleges that at the time of entering into the contract the plaintiffs through
false representations lead him to believe that they were in possession of the land and that the title to the greater portion thereof was not
in dispute; that on seeking to obtain possession he found that practically the entire area of the land was occupied by advers e claimants
and the title thereto disputed; that he consequently has been unable to obtain possession of the land; and that the plaintiffs have made
no efforts to prosecute the proceedings for the registration of the land. He therefore asks that the contract be rescinded; that the
plaintiffs be ordered to return to him the P30,000 already paid by him to them and to pay P25,000 as damages for breach of the
contract.
The court below dismissed the plaintiffs' complaint, declared the contract rescinded and void and gave the defendant judgment upon
his counterclaim for the sum of P30,000, with interest from the date upon which the judgment becomes final. The case is now before
this court upon appeal by the plaintiffs from that judgment.
The contract in question reads as follows:
Know all men by these presents:
That I, Guadalupe Gonzalez y Morales de Gomez, married with Luis Gomez, of age, and resident of the municipality of Bautista,
Province of Pangasinan, Philippine Islands, do hereby state:
1. That I am the absolute and exclusive owner of a parcel of land situated in the barrio of Partida, municipality of Guimba, Nueva Ecija,
described as follows:
Bounded on the north by the land of Don Marcelino Santos; on the east, by the land of Doa Cristina Gonzalez; on the south by the
Binituan River; and on the west, by the land of Doa Ramona Gonzalez; containing an area of 488 hectares approximately.
2. That an application was filed for the registration of the above described land in the registry of property of Nueva Ecija, which
application is still pending in the Court of First Instance of Nueva Ecija.
3. That in consideration of the sum of P125 per hectare I do hereby agree and bind myself to sell and transfer by way of real and
absolute sale the land above described to Mr. E.J. Habere, binding myself to execute the deed of sale immediately after the decree of
the court adjudicating said land in my favor is registered in the registry of property of the Province of Nueva Ecija. The condition of this
obligation to sell are as follows:
"1. That Mr. E.J. Haberer has at this moment paid me the sum of P30,000 on account of the price of the aforesaid land.
"2. That said Mr. E.J. Haberer agrees and binds himself to pay within six months from the date of the execution of this document the
unpaid balance of the purchase price.
"3. That said Mr. E.J. Haberer shall have the right to take possession of the aforesaid land immediately after the execution of this
document together with all the improvements now existing on the same land, such as palay plantation and others.
"4. That said Mr. E.J. agrees and binds himself to pay the expenses to be incurred from this date in the registration of the aforesaid land
up to the filing of the proper decree in the office of the register of deeds of the Province of Nueva Ecija.
"5. That in the event that the court should hold that I am not the owner of all or any part of the aforesaid land, I agree and bind myself to
return without interest all such amounts of money as I have received or may receive from Mr. E.J. Haberer as the purchase price of said
land, but, in the event that the court should adjudicate a part of the aforesaid land to me, then I agree and bind myself to sell said
portion adjudicated to me, returning all the amounts received from Mr. E.J. Haberer in excess of the price of said portion at the rate of
P125 per hectare.
"6. The Mr. E.J. Haberer does hereby waive any interest or indemnity upon the amount that I am to return to him and which I have
receive from Mr. E.J. Haberer as the purchase price of the aforesaid land."
I, E.J. Haberer, married, of age, and resident of the municipality of Talavera, Nueva Ecija, do hereby state that, having known the
contents of this document, I accept the same with all the stipulations and conditions thereof.
I, Luis Gomez, married, of age, and resident of the municipality of Bautista, Province of Pangasinan, do hereby grant my wife, Da.
Guadalupe Gonzalez y Morales de Gomez, the due marital license to execute this document and make effective the definite sale of the
land as above stipulated, she being empowered to execute the deed of sale and other necessary documents in order that the full
ownership over the aforesaid land may be transferred to Mr. E.J. Haberer, as stipulated in this document.

In testimony whereof, we hereunto set our hands at Manila, this 7th day of July, 1920.
(Sgd.) GUADALUPE G. DE GOMEZ
E.J. HABERER
LUIS GOMEZ
Signed in the presence of the witnesses:
(Sgd.) EMIGDIO DOMINGO
L.G. ALVAREZ
(Acknowledged before notary.)
It is conceded by the plaintiffs that the defendant never obtained actual or physical possession of the land, but it is argued that under
the contract quoted the plaintiffs were under no obligation to place him in possession. This contention cannot be sustained. Cause 3 of
paragraph 3 of the contract gave the defendant the right to take possession of the land immediately upon the execution of the contract
and necessarily created the obligation on the part of the plaintiffs to make good the right thus granted; it was one of the essential
conditions of the agreement and the failure of the plaintiffs to comply with this condition, without fault on the part of the defendant, is in
itself sufficient ground for the rescission, even in the absence of any misrepresentation on their part. (Civil Code, art. 1124 ; Pabalan vs.
Velez, 22 Phil., 29.)
It is therefore unnecessary to discuss the question whether the defendant was induced to enter into the agreement through
misrepresentation made by the plaintiff Gomez. We may say, however, that the evidence leaves no doubt that some misrepresentations
were made and that but for such misrepresentations the defendant would not have been likely to enter into the agreement in th e form it
appeared. As to the contention that the plaintiff Gonzalez cannot be charged with the misrepresentations of Gomez, it is sufficient to
say that the latter in negotiating for the sale of the land acted as the agent and representative of the other plaintiff, his wife; having
accepted the benefit of the representations of her agent she cannot, of course, escape liability for them. (Haskell vs. Starbird, 152
Mass., 117; 23 A.S.R., 809.)
The contention of the appellants that the symbolic delivery effected by the execution and delivery of the agreement was a sufficient
delivery of the possession of the land, is also without merit. The possession referred to in the contract is evidently physical; if it were
otherwise it would not have been necessary to mention it in the contract. (See Cruzado vs. Bustos and Escaler, 34 Phil., 17.)
The judgment appealed from is in accordance with the law, is fully sustained by the evidence, and is therefore affirmed, with the costs
against the appellants. So ordered.
Johnson, Street, Malcolm, Villamor, Johns, and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-13438

November 20, 1918

FRANCISCO GUTIERREZ REPIDE, plaintiff-appellant,

vs.
IVAR O. AFZELIUS and his wife, PATROCINIO R. AFZELIUS, defendants-appellees.
Ramon Fernandez for appellant.
T. L. McGirr for appellees.

MALCOLM, J.:
The subject of Specific Performance, with reference to its common law and civil law status, it to be considered on this appeal. The
particular action is for the specific performance of a contract for the sale and purchase of real estate.
The plaintiff is the owner of a certain parcel of realty consisting of 2,695.24 square meters, situated in the city of Manila, and fully
described in the complaint. About the month of December, 1916, the defendants made a proposition to the plaintiff for the purchase of
this property. After negotiating for some time, it was agreed that the defendants would pay plaintiff the sum of P10,000 for the land,
P2,000 of which was to be handed over upon the signing of the deed, and the balance of P8,000, paid in monthly installments o f P150.
The property was to be mortgaged to the plaintiff to secure the payment of this balance of P8,000. The plaintiff proceeded to have
survey made of the land and to prepare the deed and mortgage. Expenses to the amount of P83.93 were incurred for these purposes.
The deed was ready about December 28, 1916, when the defendants were notified to appear and sign the same. They failed to do this,
and instead, the defendant, Patrocinio R. Afzelius, wrote a letter to plaintiff, as follows:

MANILA, January 3, 1917.

MR. FRANCISCO GUTIERREZ,
Manila.
MY DEAR SIR: It is with regret that I inform you that it is now absolutely impossible for us to effect the purchase of the property at Juan
Luna Street, as it was our desire to do. The reason for this is that the business has failed, in which we had invested all the money we
had and from which he hope to obtain sure gains and to get the P2,000 which we were to give you in advance for the purchase of said
property, and consequently, we have lost our savings and our hope of being able to purchase the property for the time being.
Before closing, I request you to pardon us for the troubles we have caused you, for, in truth, we acted in good faith, but, as you will
readily realize, without having the P2,000 in our hands, it will be impossible for us to effect the purchase.
Reiterating my request that you pardon us for all the trouble, I am
Very truly yours.
(Sgd.)

PATROCINIO R. AFZELIUS.

In addition to the letter above quoted, Afzelius testified on the trial that although he and his wife had available the sum of P2,000 to pay
the first installment on the purchase price of the land, yet it belonged in part to his wife's sister, and that, as she subsequently needed
the money for something else, they had to return it to her, and in order to give excuses to the plaintiff, his wife wrote this letter to the
plaintiff.
Plaintiff was, and still is, willing to execute the deed in accordance with the terms agreed upon with the defendants. Accordingly,
plaintiff, in his action in the Court of First Instance of the city of Manila, asked judgment against the defendants condemning them to
sign the deed and mortgage to the land in question, and to pay the purchase price stipulated, with costs. The defendants filed a general
denial, alleging that the plaintiff has not sustained damages of any kind or character, and praying that the case be dismissed at the cost
of the plaintiff. The trial court, after finding the facts as herein stated, made application thereto of the law of Specific Performance. After
stating the general principles of this branch of the law, the court deduced therefrom that the remedy by specific performance is one the
granting or denying of which rests in the exercise of sound judicial discretion. The court said:
Whether or not the defendants are able to perform the contract is a matter of defense, and there is no special defense on that subject in
the answer; but it appears from the evidence that the defendants have not the funds available for the cash payment on the contract,
and apparently the performance of the contract in the terms agreed between the plaintiff and defendants would be impracticable; the
court would not be able to enforce a decree for specific performance, and such a decree might operate as a great hardship upon the
defendants; therefore, the court is of the opinion that it would be useless, unjust and inequitable to render judgment herein for specific
performance.lawphil.net
The judgment then was in favor of the defendants, dismissing the plaintiff's complaint, without prejudice to any other remedy which the
plaintiff might have, and without any finding as to the costs.
The plaintiff and appellant bases his argument on articles 1254, 1258, 1278, 1450, and 1279 of the Civil Code. The provisions of the
five articles first cited and others that could be mentioned merely tend to corroborate what is self-evident, namely, the existence of a
valid contract between the parties. Indisputably, there has been an offer and an acceptance, and all that remained to effectuate the
contract was the execution of the deed and the mortgage.
The article of the Civil code chiefly relied upon by appellant, No. 1279, would seem to settle favorably the first branch of the prayer of
the complaint, asking that the defendants be required to sign the deed and mortgage to the land in question. This article of the Civil
Code appears to have been prepared to meet exactly such a situation, to the end that the contracting parties can reciprocally compel
the observance of the necessary formalities.

Other portions of the Civil Code not called to our attention by the appellant, notably articles 1096, 1098, 1124 and 1451, recognize what
is denominated in the common law as Specific Performance. Article 1451 provides that, "A promise to sell or buy, when there is an
agreement as to the thing and the price, entitles the contracting parties reciprocally to demand the fulfillment of the contract." But the
article in recognition of a negative result also provides, "whenever the promise to purchase and sell cannot be fulfilled, the provisions
relative to obligations and contracts, contained in this book, shall be applicable in the respective cases to the vendor and the vendee."
Turning to these provisions relating to obligations and contracts, we find article 1096 making a distinction between a specific thing to be
delivered and an indeterminate or generic thing; article 1098 providing that a person is obligated to do a certain thing according to the
tenor of the obligation; and finally, article 1124 in absolute approval of contractual mutually decreeing that "the person prejudiced may
choose between exacting the fulfillment of the obligation or its resolution with indemnity for damages and payment of interest in either
cases."
As to whether the vendor can compel the vendee to perform, which is the point before the court, the jurisprudence of the supreme court
of Spain and the commentaries of Manresa do not in the least attempt to distinguish between one or the other party, the vendor or the
vendee, but constantly and without exception use the word "reciprocamente." the following decisions of the supreme court of Spain
interpretative of these articles can be noted: April 17, 1897; October 10, 1904; February 4, 1905.
The vendee is entitled to specific performance essentially as a matter of course. Philippine cases have so held. (Irureta Goyena vs.
Tambunting [1902], 1 Phil., 490; Thunga Chui vs. Que Bentec [1903], 2 Phil., 561; Couto Soriano vs. Cortes [1907, 8 Phil., 459; Dievas
vs. Co Chongco [1910], 16 Phil., 447.) If the doctrine of mutuality of remedy is to apply, the vendor should likewise be entitled to similar
relief. Philippine jurisprudence, however, has never as yet been afforded an opportunity to so hold. The nearest approach to the idea
has been, with reference to merchandise, in a decision to the effect that if the purchaser refuses without lawful reason to accept
delivery when tendered by the seller in conformity with the contract of sale, the seller may elect to enforce compliance or to rescind.
(Matute vs. Cheong Boo [1918], 37 Phil., 372.)
Thus far, in this opinion we have discussed the question of whether the vendor as well as the vendee is entitled to the specific
performance of the contract for the sale of land, from the standpoint of the civil law. Now, of course, specific performance of contracts
is, under this name, an equitable remedy. As such, since there exist no courts of equity and no equity jurisprudence in this jurisdiction,
the authority arising from the common law is not of binding force in the Philippines. Nevertheless, as the civil law and the common law
seem to arrive at the same goal on this subject, we should at least notice as persuasive authority the jurisprudence of the United States
and Great Britain.
The American and English cases that relate to specific performance by the vendor are with a few exceptions all one way. In the
language of Chief Justice Marshall, "The right of a vendor to come into a court of equity to enforce a specific performance is
unquestionable." (Cathcart vs. Robinson [1831], 5 Pet., 264.) The rule in nearly all jurisdictions is that specific performance may be had
at the suit of the vendor of land, the vendee being decreed to accept the deed and pay the purchase price. (Freeman vs. Paulson
[1909], 107 Minn., 64; Migatz vs. Stieglitz [1905], 166 Ind., 362; Robinson vs. Appleton [1888], 124 Ill., 276; Hodges vs. Kowing [1889],
58 Conn., 12; Curtis Land & Loan Co. vs. Interior Land Co. [1908], 137 Wis., 341; The Maryland Clay Co. vs. Simpers [1903], 96 Md.,
1; Old Colony R. Corp. vs. Evans [1856], 6 Gray, 25; Raymond vs. San Gabriel rec. Co. [1893], 53 Fed., 883; 36 Cyc., 565.) The
reasoning supporting the authorities is that the performance of contracts must and should be mutual. The contract is ordinarily bilateral.
So should the respective rights of the parties be. Nor does an action to recover damages for breach of contract ordinarily afford a
complete and adequate remedy. The equitable doctrine is not applied where it will be productive of great hardship.
Here we have presented a good and valid contract, bilateral in character, and free from all taint of fraud. The stability of commercial
transactions requires that the rights of the seller be protected just as effectively as the rights of the buyer. If this plaintiff had refused to
comply with the contract, specific performance of the obligation could have been asked by the defendants. Just as surely should the
plaintiff who has lived up to his bargain and who has been put to expense to do so, be permitted to coerce the defendant into going
through with the contract.
The excuse of the defendants is that they do not now have the money to pay the first installment. In other words, they plead
impossibility of performance. The rule of equity jurisprudence in such a case is that mere pecuniary inability to fulfill an engagement
does not discharge the obligation of the contract, not does it constitute any defense to a decree for specific performance. (Hopper vs.
Hopper [1863], 16 N. J. Eq., 147.) Now, the courts will not make an order obviously nugatory. But the courts should lend their
assistance to the plaintiff to compel the defendants to fulfill their obligation. Besides requiring the defendants to sign the contract and
the mortgage, the judgment of the court can be aided by execution on the property of the defendants. If, then, it is found that it is
impossible for the defendants to live up to their agreement, naturally the plaintiff will rest content if for no other reason than for the
protection of his financial interests.
Judgment shall be reversed, and an order shall issue, condemning the defendants to sign the deed and mortgage to the land in
question and to pay the first installment of the purchase price as stipulated.
The appellant shall recover costs of both instances. The Code of Civil Procedure in its Chapter XXI entitled "Costs in the Several
Courts" states in section 487 that "Costs shall ordinarily be allowed to the prevailing party as a matter of course . . . . " Philippine law is,
in this respect, identical with the general rule, which is that "On reversal, . . . the costs will generally go to the prevailing party, that is, to
the appellant." (7 R. C. L., 801, citing cases.) No special reasons exist in this case for modifying the general rule. So ordered.
Johnson, Street, Avancea and Fisher, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF
COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R
dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the
petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for
P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title
the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period
of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional
capital to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his
wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution
of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month
period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to
Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the
P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00
balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued
Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote,
decided as follows:
1)
To prohibit the bank from making new loans and investments [except investments in government securities] excluding
extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon
as possible;
xxx

xxx

xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency,
issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting
Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an
application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the
sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance
or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance
of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of
12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the
Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino
and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M.
Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and
lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by
affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither
foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.

The issues are:

1.

Can the action of Sulpicio M. Tolentino for specific performance prosper?

2.

Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3.
If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said
amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook
reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco
vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and
willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay
(Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings
Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his
willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued.
Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary
Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further
business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan.
The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No.
265, which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its
obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contrac ted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by
him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the
supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The
act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering
that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt.
Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently
of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the
exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its
reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected
to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is
the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must
investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals
for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by
bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the
valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by
the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of'
Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2,
Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived."
Petitioners, thus, cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under
Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island
Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00
loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the
P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover
it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to
Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations
under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right
to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not si gned a
promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to
comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00
debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of
the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in
offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he
should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs.
Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the

accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no
debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of
consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is subsequent to
the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs,
Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in
Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the
mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p.
88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M.
Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage
as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of
other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor
which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1.
SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF
P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO
AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2.
IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES
SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3.
THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS
HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-2837

August 4, 1950

ROSARIO S. VDA. DE LACSON, ET AL., plaintiffs-appellees,

vs.
ABELARDO G. DIAZ, defendant-appellant.
Jose R. Querubin for appellant.
Ramon Diokno and Jose W. Diokno for appellees.
TUASON, J.:
This case, here on appeal from the Court of First Instance of Negros Occidental, involves an interpretation of a pre-war contract of
lease of sugar-cane lands and the liability of the lessee, defendant and appellant, to pay rent for the period during and immediately
following the Japanese occupation. The defendant resisted payment of that rent of the theory of force majeure, and claims, besides,
right to an extension of the lease to make-up for the time when no cane was planted.
The material facts are set forth in the appealed decision as follows:
It appears that on June 2, 1939, the plaintiff, Rosario S. Vda. de Lacson, as atty.-in-fact of the other plaintiffs leased to the defendant,
Abelardo G. Diaz, lots Nos. 429 and 1179 of the Talisay Cadastre, together with its sugar quota of about 5,728.50 piculs. The term of
the lease was for five crop years beginning with the crop year 1940-41; with an option in favor of the defendant for another two years,
after the expiration of the original period. The contract provided that the defendant was to pay to the plaintiffs an annual rental of 1,000
piculs of export sugar , of which 500 piculs were to be paid in the month of January of every year and the rest at the end of every milling
season. The defendant also obligated himself to pay to the plaintiff 20% of whatever alcohol he receive from the Talisay-Silay Milling
Co. Inc. corresponding to the haciendas above-mentioned.
To guarantee the payment of the said annual rentals, the defendant Abelardo Diaz, loaned to the plaintiffs the sum of P10,000 without
interest, which was to be paid by plaintiffs with the proceeds of the annual rentals in sugar provided however, that the sum of P7,000
was to be maintained as the permanent balance until the termination of the lease period, as security for the payment by the defendant
of said rentals.
On October 23, 1940, a supplementary agreement (was) entered into between the parties so as to include in the lease contract the
rights and interests also of the plaintiff, Rosario S. Vda. de Lacson in the haciendas in question. It was further agreed that out of the
annual rental of 1,000 piculs to be sold by the defendant, Abelardo Diaz in such price as may be agreeable to the plaintiff, Rosario S.
Vda. de Lacson, from the proceeds of which the sum of P2,000.00 was to be applied to the loan of P10,000 extended by the defendant
to the plaintiffs. The balance of 100 piculs of said yearly rental was to be placed at the complete disposition of the plaintiff, Rosario S.
Vda. de Lacson.
The defendant took possession of the haciendas in question beginning with the crop year 1940-41. In that year he paid to the plaintiffs
the corresponding rental of 1,000 piculs of sugar and their share in alcohol. As provided for in the supplementary agreement the
defendant Abelardo G. Diaz, with the approval of the plaintiff, Rosario S. Vda. de Lacson, sold 400 piculs of said rentals for the sum of
P1,984.76, and this amount was applied on the loan of the plaintiffs thereby leaving a balance of P8,015.24 against them and in favor of
the defendant at the beginning of the crop year 1941-42.
On December 8, 1941, the war broke out. The defendant claims that due to the unsettled conditions which follows, he was unable to
mill all his sugar canes so that during the crop year 1941-42 he produced only the total amount of 966.42 piculs of sugar from the two
haciendas, of which 579.86 piculs went to him as his planter's share. It appears that the defendant failed to pay the plaintiffs the rentals
of 1,000 piculs of export sugar and alcohol for said crop year. The defendant tried to prove, however, that he assigned 225.65 piculs in
1941-42 to the Agricultural and Industrial Bank for the account of the plaintiffs, but it was not duly established to the satisfaction of this
court that the said Bank actually received the assignment.
The defendant also failed to pay the plaintiffs the stipulated rentals for the remaining crop years up to the present time, although the
plaintiffs had made several demands for their payment, so that on September 17, 1946, this action was commenced by the plaintiffs for
the rescission of the lease contract.
From the evidence adduced during the trial it was established that during the years 1943 and 1944 the haciendas in question were
worked and cultivated by the tenants of the defendant who planted cereal crops thereon like corn and rice but there was no evidence as
to how much was really produced on the land. The defendant himself admitted that he planted rice on the haciendas during the years
1945 and 1946, which brought him a net participation of 200 cavanes for each of these years. The defendant also admitted that he did
not give the plaintiffs any participation in the rice or other crops he had produced in the said haciendas, because according to him, his
obligation was to pay rentals in sugar only, and not in any other kind of products. It also appears that the defendant has been unable to
plant sugar canes on the haciendas in question except in preparation for the 19947-48 crop year which he estimated to be around ten
hectares.
The court below absolved the defendant, on the principle of fortuitous circumstance, from any liability for rent for the crop years 194243, 1943-44 and 1944-45, although it allowed the plaintiffs "proportionate share of the War Damage Compensation which the defendant
may recover from the War Damage Commission for the products of the afore-mentioned haciendas for the crop year 1941-42, on the
basis of P5,000, the total value of 1,000 piculs of sugar which is the corresponding rental of said haciendas for the crop year 1941-42."
(The defendant had filed a damage claim for the destruction early in 1942 of standing crops.) But the court gave judgment for the
plaintiffs for rent with interest corresponding to the crop years 1945-46 and 1946-47, amounting to P60,000, the value of 2,000 piculs of
sugar, from which amount was to be deducted the sum of P8,015.24 due the defendant by the plaintiffs for advances. The court
likewise declared the lease terminated after the crop year 1946-47.
On the last point, it is the defendant's contention that he and the plaintiffs stipulated seven sugar "crops" and not seven "crop years as
the duration of the lease and that this period should be computed by the number of times sugar crops were raised and not by number of
years that transpired from the inception of the contract.

We are unable to see any essential difference between crops and crop years sufficient to alter the result. Under one or the other theory,
it seems to us that the contract contemplated seven consecutive agricultural years. To the lessors time was of the essence of the lease
and they could not conceivably have agreed to have discounted from the period, years which the lessees, who had the exclusive
disposition of the lands, might not care to plant sugar cane or not use the lands at all.
Any how the contract speaks of "cosechas agricolas", and nowhere is there any insinuation that the defendant-lessee was to have
possession of the lands for seven years excluding years on which he could not harvest sugar. On the contrary, the parties not only used
the generic expression "cinco cosechas agricolas" but followed it with the phrase "periodo de cinco aos."
The more important issue, though by no means difficult to decide, concerns the obligation of the lessee to pay the stipulated rent for the
crop years 1945-46 and 1946-47. Admitting that those post-liberation years, the lessee claims exemption from the obligation stipulated
for delivery of 1,000 piculs of centrifugal sugar as rent for each milling season, and the Talisay-Silay Milling Co. Inc., he adds, had been
destroyed and he could not mill any sugar.
The law regulating the facts of force majeure on contracts is to be found in the following articles of the Civil Code:
ART. 1096. Should the thing to be delivered be a determinate one the creditor, independently of the right granted him by article 1004,
may compel the debtor to make the delivery.
Should the thing be determinate or generic, he may demand that the obligation be performed at the expense of the debtor.
Should the person obligated be in default, or should be have engaged himself to deliver the same thing or two or more different
persons, it shall be at his risk, even in case of inevitable accident, until the delivery is made.
ART. 1105. No one shall be liable for events which could not be foreseen or which, even if foreseen, were inevitable, with the exception
of the cases in which the law expressly provides otherwise and these in which the obligation itself imposes such liability.
ART. 1182. Any obligation which consists in the delivery of a determinate thing shall be extinguished if such thing should be lost or
destroyed without fault on the part of the debtor and before he is in default (mora).
In binding himself to deliver centrifugal sugar, the defendant promised a generic thing. It could be any centrifugal sugar without regard
to origin or how he secured it. Hence, his inability to produce sugar, irrespective of the cause, did not relieve him from his commitment.
War, like floods and other catastrophes, was a contingency, a collateral incident, which he could have provided for by proper stipulation.
(Reyes vs. Caltex (Philippines) Inc., 47 Off. Gaz., 1193.
In reality there was no fortuitous event which interfered with the exploitation of the leased property in the form and manner the
defendant had intended. We refer to the agricultural years 1945-46 and 1946-47. It should be observed that the defendant was not
bound to keep the lands during those years; it was entirely optional on his part to put an end to the lease after the 1944-45 crop year.
When he decided to exercise the option he was fully aware that there were no sugar mills in operation and he did not except to produce
sugar, He must have had an object other than to plant sugar cane when he chose to retain the lands for two more years. His purpose
was, beyond doubt, to plant other crops, which he did. If those crops did not bring good return he can not, under any principle of law or
equity, shift the loss to the lessor. Performance is not excused by the fact that the contract turns out to be hard and improvident,
unprofitable or impracticable, ill-advised, or even foolish. (Reyes vs. Caltex, supra.)
In the fourth assignment of error the appellant objects that "the trial court . . . awarded the plaintiffs more than what is prayed for in the
complaint." He says that the plaintiffs pray "either the rescission of the contract of lease and the immediate delivery . . . of lots 429 and
1179 of Talisay, or in the alternative, to condemn the defendant to pay 5,000 piculs of export sugar; and to pay P500 as liquidated
damages and costs.".
We do not think the trial court erred in granting both remedies although the prayer was in the alternative. The situation or status of the
contract had changed in the interval between the commencement of the suit and the rendition of the judgment. At the time the
complaint was filed (September 12, 1946), the lease had not yet expired. Its expiration took place during the pendency of the action, a
fact of which court was justified in taking cognizance.
For the rest, the prayer is not a material factor of the complaint. It is not the prayer but the proven facts which determine the power of
the court to act.
SEC. 9. Extent of relief to be awarded. A judgment entered by default shall not exceed the amount or be different in kind from that
prayed for the demand for judgment. In other cases the judgment shall grant the relief to which the party has not demanded such relief
in his pleadings. (Rule 35, Rules of Court.)
But when the defendant is not in default, plaintiff. after trial, may be granted any relief that is supported by the evidence, although not
specified in his pleadings. As held by the Supreme Court, plaintiff's failure, in such cases, to specify the relief to which he is entitled, is
immaterial, and even if the complaint contains no prayer for relief, he is still entitled to such a relief as the facts proven may warrant. It is
a rule of pleadings that the prayer for relief, though part of the complaint, is no part of the cause of action, and plaintiff is entitled to as
much relief as the facts may warrant. (I Moran, Comments on the Rules of Court, 574.)
It is unquestionable that, under the proven facts, the court had the power to grant the remedies it did.
The defendant's counterclaim was, in our opinion, rightly overruled by the court below. Said the court:
As to the counterclaims filed by the defendant the court cannot reasonably entertain it for the simple reason that there was no sufficient
evidence supporting it and the fact that the seven-year period, stipulated in the contract, including the option of two years in favor of the
defendant, had already expired at the end of the crop year 1946-47, which is of judicial notice to be at the end of May, 1947. After the
period, the defendant is no longer entitled to the possession of the haciendas in question, nor their corresponding sugar quota for the
crop year 1947-48. If the defendant had already planted sugar canes to the extent he had testified to during the trial in preparation for
the 1947-48 milling season, he did so at his own risk and responsibility for which he could not hold the plaintiffs herein liable for any
loss he may suffer thereby.
The judgment is affirmed with costs.
Ozaeta, Pablo, Montemayor, and Reyes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-4440

August 29, 1952

BUNGE CORPORATION and UNIVERSAL COMMERCIAL AGENCIES, plaintiffs-appellees,

vs.
ELENA CAMENFORTE and COMPANY, doing business or trading under the name and style of Visayan Products Company, ET AL.,
defendants-appellants.
Juan E. Yap and J.P. Garcia for appellants.
Vicente L. Faelnar for appellees.
BAUTISTA ANGELO, J.:
Plaintiffs brought action against the defendants to recover certain damages they have allegedly sustained in view of the failure of the
latter to deliver to the former the amount of Philippine copra which they had agreed to deliver within the time and under the conditions
specified in the contract celebrated between them on October 22, 1947.
Plaintiffs claim that on October 22, 1947, in the City of Cebu a contract was entered into between the Visayan Products Company and
Bunge Corporation (represented by the Universal Commercial Agencies) whereby the former sold to the latter 500 long tons of
merchantable Philippine copra in bulk at the prices of $188.80, U.S. currency, per ton, less 1 per cent brokerage per short ton of 2,000
pounds, C & F Pacific Coast, U.S.A.; that, according to the terms and conditions of the contract, the vendor should ship the stipulated
copra during the month of November or December 1947, to San Francisco, California, U.S.A. for delivery to the vendee; that,
notwithstanding repeated demands made by the vendee, the vendor failed to ship and deliver the copra during the period agreed upon;
that believing in good faith that the vendor would ship and deliver the copra on time, the vendee sold to El Dorado Oil Works the
quantity of copra it had purchased at the same price agreed upon; and that because of the failure of the vendor to fulfill its contract to
ship and deliver the quantity of copra agreed upon within the period stipulated, the vendee has suffered damages in the amount of
P180,00.
Defendants answered separately the allegations set forth in the complaint and, with the exception of Vicente Kho, denied that the
Visayan Products Company has ever entered into a contract of sale of copra with the plaintiffs, as mentioned in the complaint. They
aver that if a contract of that tenor has ever been entered into between said company and the plaintiffs, the truth is that Vicente Kho
who signed for and in behalf of the company never had any authority to act for that company either expressly or impliedly, inasmuch as
the only ones who had the authority to do so are Elena Camenforte, the general manager, Tan Se Chong, the manager, and Tiu Kee,
the assistant manager.
Vicente Kho, on his part, after admitting that the commercial transaction mentioned in the complaint had actually taken place, avers that
the contract was concluded with the Visayan Products Company which had its office in Tacloban, Leyte, and not with the Visayan
Products Company established in Cebu, which is not a party to the transaction; that the Visayan Products Company organized in
organized in Tacloban is the one that was presented by him in the transaction, of which he is the manager and controlling stockholder,
which fact was clearly known to the plaintiffs when the contract was entered into believing that the company he was representing was
the one recently organized in Cebu; that he, Vicente Kho, did his best to comply with the contract, but he failed because of force
majeure as follows: he informed the plaintiffs sometime in December, 1947, that he would have all the copra covered by the contract
ready for shipment somewhere in the port of San Ramon, Samar, in order that they may make an arrangement for the booking of a
ship, but before the arrival of the ship, a strong storm visited the place causing the bodega where the copra was stored to be destroyed
and the copra washed away into the sea; and that, because of this force majeure, he cannot now be held liable for damages.
After trial, art which both parties presented their respective evidence, the court rendered decision ordering defendant Elena Camenforte
& Company to pay to the plaintiffs the sum of P79,744, with legal interest thereon from the filing of the complaint, and the costs of
action. The court ordered that, in case said company be unable to pay the judgment because of total or partial insolvency, the same be
paid by its co-defendants, jointly and severally, either in full or such part thereof as may be left unpaid. Defendants interposed the
present appeal.
At the outset, it should be stated that while in the lower court there was a dispute between plaintiffs and defendants as regards the real
contract that was entered into between the parties and which he was given rise to this litigation, that defense apparently has been
abandoned in this appeal, for the only issue now raised by appellants is one of law. Thus, appellants now admit, contrary to their stand
in the lower court, that a contract of purchase and sale of copra was in effect entered into between the plaintiffs and the defendants
under the terms and conditions embodied in the contract quoted in the complaint, and the only defense on which they now rely is that
the copra they had gathered and stored for delivery to the appellees in Samar was destroyed by force majeure which under the law has
the effect of exempting them from liability for damages. Consequently, appellants now contend that the lower court erred in condemning
them for damages despite the fact that their failure to fulfill the contract is due to force majeure.
A perusal of the contract is necessary to see the feasibility of this contention. The contract is embodied in Exhibit C. A perusal of this
contract shows that the subject matter is Philippine copra. The sale is to be made by weight, 500 long tons. It does not refer to any
particular or specific lot of copra, nor does it mention the place where the copra is to be acquired. No portion of the copra has been
earmarked or segregated. The vendor was at liberty to acquire the copra from any part of the Philippines. The sale simply ref ers to 500
long tons of the Philippine copra. The subject-matter is, therefore, generic, not specific.
Having this view in mind, it is apparent that the copra which appellants claim to have gathered and stored in a bodega at San Ramon,
Samar, sometime in December, 1947, in fulfillment of their contract, and which they claim was later destroyed by storm, in the
supposition that the claim is true, cannot be deemed to be the one contemplated in the contract. It may be the one chosen by
appellants in the exercise of the discretion given to them under the contract, which they could exercise in a manner suitable to their
interest and convenience, but it cannot certainly be considered as the copra contemplated by the parties in the contract. And this must
be so because the copra contemplated in the contract is generic and not specific.
It appearing that the obligation of appellant is to deliver copra in a generic sense, the obligation cannot be deemed extinguised by the
destruction or disappearance of the copra stored in San Ramon, Samar. Their obligation subsists as long as that commodity is
available. A generic obligation is not extinguished by the loss of a thing belonging to a particular genus. Genus nunquan perit.

Manresa explains the distinction between determinate and generic thing in his comment on article 1096 of the Civil Code of Spain,
saying that the first is a concrete, particularized object, indicated by its own individuality, while a generic thing is one whose
determination is confined to that of its nature, to the genus (genero) to which it pertains, such as a horse, a chair. These definition are in
accord with the popular meaning of the terms defined.
Except as to qualify and quantity, the first of which is itself generic, the contract sets no bounds or limits to the palay to be paid, nor was
there even any stipulation that the cereal was to be the produce of any particular land. Any palay of the quality stipulated regardless of
origin or however acquired (lawfully) would be obligatory on the part of the obligee to receive and would discharged the obligation. It
seems therefore plain that the alleged failure of crops through alleged fortuitos cause did not excuse performance." (De Leon vs.
Soriano, 87 Phil., 193; 47 Off Gaz., Supplement No. 12, pp. 377, 379-380.)
In binding himself to deliver centrifugal sugar, the defendant promised a generic thing. It could be any centrifugal sugar without regard
to origin or how he secured it. Hence, his inability to produce sugar, irrespective of the cause, did not relieve him from his commitment.
War, like floods and other catastrophies, was a contingency, a collateral incident, which he could have provided for by proper
stipulation. (Reyes vs. Caltex, 84 Phil., 654; 47 Off, Gaz., 1193; Vda.-Lacson vs. Diaz, 87 Phil., 150; 47 Off. Gaz., Supp. to No. 12, p.
337.)
If appellants are not relieved of civil liability under the contract, what are then the damages for which they stand liable to the appellees?
Appellees claim that, immediately after they had concluded their agreement to buy copra with the appellants, they agreed to sell to El
Dorado Oil Works the 500 long tons of copra subject matter of the agreement, together with another lot of 500 tons, confident in their
belief that the Visayan Products Company would comply with its agreement. The copra was to delivered by Bunge Corporation to El
Dorado Oil Works not later than December 31, 1947. Because of the failure of the appellants to fulfill their aforementioned agreement,
appellees failed to deliver the copra it sold with the result that they had to pay damages in the sum of $84,630.86 (or P169,461.72).
The lower court, however, did not sustain this claim in view of the discrepancy of one day it note in the dates of execution of the
contracts of sale of the copra in question. The court found that the contract signed by El Dorado Oil Works is dated October 21, 1947,
(Exhibit O), whereas the contract signed by the Visayan Products Company is dated contract had been executed one day latter than
the former, which gives rise to the belief that the copra that was sold to the El Dorado Oil Works could not have been the one
purchased from the appellants. Nevertheless, the court awarded damages to the appellees taking into account the highest price of
copra in the market during the month of December, 1947, as per statement Exhibit P, even though the appellees had made no
allegation in their complaint of any offer or transaction they might have had with other copra dealers during the period contemplated in
the contract in question.
We are of the opinion that the lower court erred in disregarding the transaction with the El Dorado Oil Works simply because it found an
apparent discrepancy in the dates appearing in the contracts Exhibits O and C. Exhibit C appears dated on October 22, 1947, and was
executed in Cebu, Philippines, whereas Exhibit O appears dated on October 21, 1947, and was executed in New York City. the
difference of one day in the execution of these documents is merely nominal because New York time is several hours behind Cebu
time. In fact both transactions have been practically executed on the same day. Even supposing that the contract with the El Dorado Oil
Works calls for future and not present deliveries. There is nothing improbable for the appellees to sell copra which they expect to
acquire sometime in the future for purposes of speculation. But this error cannot now materially change the result of this case
considering that plaintiffs-appellees did not appeal from the decision. "It has been held that appellee, who is not appellant, may also
assign errors in his brief where his purpose is to maintain the judgment on other grounds, but he may not do so if his purpose is to have
the judgment modified or reversed, for, in such case, he must appeal." (Saenz vs. Mitchell, 60 Phil., 69, 80; see Mendoza vs. Mendiola,
53 Phil., 267; Villavert vs. Lim, 62 Phil., 178; Bajaladia vs. Eusala, G. R. No. 42579). Wherefore, the decision appealed from is affirmed,
with costs against appellants.
Paras, C.J., Padilla, Tuason, Montemayor and Labrador, JJ., concur.

SECOND DIVISION
[G.R. No. 124922. June 22, 1998]
JIMMY CO, doing business under the name & style DRAGON METAL MANUFACTURING, Petitioner, vs. COURT OF APPEALS
and BROADWAY MOTOR SALES CORPORATION, Respondents.
DECISION
MARTINEZ, J.:
On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988 model[1] to private respondent - which is engaged in the sale,
distribution and repair of motor vehicles - for the following job repair services and supply of parts:
- Bleed injection pump and all nozzles;
- Adjust valve tappet;
- Change oil and filter;
- Open up and service four wheel brakes, clean and adjust;
- Lubricate accelerator linkages;
- Replace aircon belt; and
- Replace battery[2]
Private respondent undertook to return the vehicle on July 21, 1990 fully serviced and supplied in accordance with the job contract.
After petitioner paid in full the repair bill in the amount of P1,397.00,[3] private respondent issued to him a gate pass for the release of
the vehicle on said date. But came July 21, 1990, the latter could not release the vehicle as its battery was weak and was not yet
replaced. Left with no option, petitioner himself bought a new battery nearby and delivered it to private respondent for installation on the
same day. However, the battery was not installed and the delivery of the car was rescheduled to July 24, 1990 or three (3) days later.
When petitioner sought to reclaim his car in the afternoon of July 24, 1990, he was told that it was carnapped earlier that m orning while
being road-tested by private respondents employee along Pedro Gil and Perez Streets in Paco, Manila. Private respondent said that
the incident was reported to the police.
Having failed to recover his car and its accessories or the value thereof, petitioner filed a suit for damages against private respondent
anchoring his claim on the latters alleged negligence. For its part, private respondent contended that it has no liability because the car
was lost as a result of a fortuitous event - the carnapping. During pre-trial, the parties agreed that:
(T)he cost of the Nissan Pick-up four (4) door when the plaintiff purchased it from the defendant is P332,500.00 excluding accessories
which were installed in the vehicle by the plaintiff consisting of four (4) brand new tires, magwheels, stereo speaker, amplifier which
amount all in all to P20,000.00. It is agreed that the vehicle was lost on July 24, 1990 `approximately two (2) years and five (5) months
from the date of the purchase. It was agreed that the plaintiff paid the defendant the cost of service and repairs as early as July 21,
1990 in the amount of P1,397.00 which amount was received and duly receipted by the defendant company. It was also agreed that
the present value of a brand new vehicle of the same type at this time is P425,000.00 without accessories.[4]
They likewise agreed that the sole issue for trial was who between the parties shall bear the loss of the vehicle which necessitates the
resolution of whether private respondent was indeed negligent.[5] After trial, the court a quo found private respondent guilty of delay in
the performance of its obligation and held it liable to petitioner for the value of the lost vehicle and its accessories plus interest and
attorneys fees.[6] On appeal, the Court of Appeals (CA) reversed the ruling of the lower court and ordered the dismissal of petitioners
damage suit.[7] The CA ruled that: (1) the trial court was limited to resolving the issue of negligence as agreed during pre-trial; hence it
cannot pass on the issue of delay; and (2) the vehicle was lost due to a fortuitous event.
In a petition for review to this Court, the principal query raised is whether a repair shop can be held liable for the loss of a custom ers
vehicle while the same is in its custody for repair or other job services?
The Court resolves the query in favor of the customer. First, on the technical aspect involved. Contrary to the CAs pronouncement, the
rule that the determination of issues at a pre-trial conference bars the consideration of other issues on appeal, except those that may
involve privilege or impeaching matter,[8] is inapplicable to this case. The question of delay, though not specifically mentioned as an
issue at the pre-trial may be tackled by the court considering that it is necessarily intertwined and intimately connected with the principal
issue agreed upon by the parties, i.e. who will bear the loss and whether there was negligence. Petitioners imputation of negligence to
private respondent is premised on delay which is the very basis of the formers complaint. Thus, it was unavoidable for the court to
resolve the case, particularly the question of negligence without considering whether private respondent was guilty of delay in the
performance of its obligation.
On the merits. It is a not a defense for a repair shop of motor vehicles to escape liability simply because the damage or loss of a thing
lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered as a fortuitous event. The fact that a
thing was unlawfully and forcefully taken from anothers rightful possession, as in cases of carnapping, does not automatically give rise
to a fortuitous event. To be considered as such, carnapping entails more than the mere forceful taking of anothers property. It must be
proved and established that the event was an act of God or was done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation.[9] In accordance with the Rules of evidence, the burden of proving that the loss
was due to a fortuitous event rests on him who invokes it[10]- which in this case is the private respondent. However, other than the
police report of the alleged carnapping incident, no other evidence was presented by private respondent to the effect that the incident
was not due to its fault. A police report of an alleged crime, to which only private respondent is privy, does not suffice to established the
carnapping. Neither does it prove that there was no fault on the part of private respondent notwithstanding the parties agreement at the
pre-trial that the car was carnapped. Carnapping does not foreclose the possibility of fault or negligence on the part of private
respondent.
Even assuming arguendo that carnapping was duly established as a fortuitous event, still private respondent cannot escape liability.
Article 1165[11] of the New Civil Code makes an obligor who is guilty of delay responsible even for a fortuitous event until he has
effected the delivery. In this case, private respondent was already in delay as it was supposed to deliver petitioners car three (3) days
before it was lost. Petitioners agreement to the rescheduled delivery does not defeat his claim as private respondent had already
breached its obligation. Moreover, such accession cannot be construed as waiver of petitioners right to hold private respondent liable
because the car was unusable and thus, petitioner had no option but to leave it.

Assuming further that there was no delay, still working against private respondent is the legal presumption under Article 1265 that its
possession of the thing at the time it was lost was due to its fault.[12] This presumption is reasonable since he who has the custody and
care of the thing can easily explain the circumstances of the loss. The vehicle owner has no duty to show that the repair shop was at
fault. All that petitioner needs to prove, as claimant, is the simple fact that private respondent was in possession of the vehicle at the
time it was lost. In this case, private respondents possession at the time of the loss is undisputed. Consequently, the burden shifts to
the possessor who needs to present controverting evidence sufficient enough to overcome that presumption. Moreover, the exempting
circumstances - earthquake, flood, storm or other natural calamity - when the presumption of fault is not applicable[13] do not concur in
this case. Accordingly, having failed to rebut the presumption and since the case does not fall under the exceptions, private respondent
is answerable for the loss.
It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the New Civil Code, liability attaches even if the loss was
due to a fortuitous event if the nature of the obligation requires the assumption of risk.[14] Carnapping is a normal business risk for
those engaged in the repair of motor vehicles. For just as the owner is exposed to that risk so is the repair shop since the car was
entrusted to it. That is why, repair shops are required to first register with the Department of Trade and Industry (DTI)[15] and to secure
an insurance policy for the shop covering the property entrusted by its customer for repair, service or maintenance as a prerequisite for such registration/accreditation.[16] Violation of this statutory duty constitutes negligence per se.[17] Having taken custody
of the vehicle, private respondent is obliged not only to repair the vehicle but must also provide the customer with some form of security
for his property over which he loses immediate control. An owner who cannot exercise the seven (7) juses or attributes of ownership
the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate and to the
fruits -[18] is a crippled owner. Failure of the repair shop to provide security to a motor vehicle owner would leave the latter at the mercy
of the former. Moreover, on the assumption that private respondents repair business is duly registered, it presupposes that its shop is
covered by insurance from which it may recover the loss. If private respondent can recover from its insurer, then it would be unjustly
enriched if it will not compensate petitioner to whom no fault can be attributed. Otherwise, if the shop is not registered, then the
presumption of negligence applies.
One last thing. With respect to the value of the lost vehicle and its accessories for which the repair shop is liable, it should be based on
the fair market value that the property would command at the time it was entrusted to it or such other value as agreed upon by the
parties subsequent to the loss. Such recoverable value is fair and reasonable considering that the value of the vehicle depreciates. This
value may be recovered without prejudice to such other damages that a claimant is entitled under applicable laws.
WHEREFORE, premises considered, the decision of the Court Appeals is REVERSED and SET ASIDE and the decision of the court a
quo is REINSTATED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision 1 of the Court of
Appeals 2 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 respondent court reversed the trial court 3 which, in dismissing the
complaint for specific performance with damages and annulment of contract, 4 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, Equatorial) to have been made without any breach of or prejudice to, the said lease
contracts. 5
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 plai ntiff
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 vacate the premises. 6
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 complaint. 7
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, Inc. and Equatorial Realty Development, Inc. as valid and binding upon all
the parties. 8
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. 6867).
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 parties. 9
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 le ased
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 noncondominium nature of the buildings, the sale would be valid and capable of being performed. A sale limited to the leased pre mises
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 subjacent land in proportion
to Mayfair's interest over the premises sold to it. 10
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 MERITS OF THE CASE IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court of Appeals.
Suffice it to say that in our Resolution, 12 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 Banc for proper disposition. 13
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 conditions thereof. 14
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.
As early as 1916, in the case of Beaumont vs. Prieto, 15 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 consideration. 16 (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 meter upon failure
to make the purchase within the time specified; 17 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 option was not supported by a distinct consideration; 18 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 consideration; 19 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 that of the other. 20 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 of Ang Yu Asuncion vs. Court of Appeals 21 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 communic ating
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 of the option. It must be supported by consideration. 22 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 in Vda. De Quirino vs. Palarca, 23 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 Asuncion vs. Court of Appeals. 24
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 "30-day 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 show to it the Contract of Lease in which Par. 20 is contained. 25
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 contract. 26 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 negotiate within
the 30-day stipulated period. 27
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 CA-G.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.