V. Defective Contracts

(Rescissible Contracts (Art. 1380-1389)

Cases:

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 194366 October 10, 2012

NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA D. NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D. ILLUT-PIALA, Petitioners, vs. HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.

D E C I S I O N

PERLAS-BERNABE, J.:

In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners Napoleon D. Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D. Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D. Illut-Piala (Victoria) seek to reverse and set aside the April 27, 2010 Decision2 and October 18, 2010 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October 25, 2004 Decision4 of the Regional Trial Court (RTC) of Panabo City, Davao del Norte and instead, entered a new one dismissing petitioners’ complaint for annulment of sale, damages and attorney’s feesagainst herein respondents heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy).

The Facts

During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first marriage with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second marriage with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa. Throughout the marriage of spouses Enrique and Anunciacion, they acquired several homestead properties with a total area of 296,555 square meters located in Samal, Davao del Norte, embraced by Original Certificate of Title (OCT) Nos. (P-7998) P-21285, (P-14608) P-51536 and P-20551 (P-8348)7issued on February 15, 1957, August 27, 1962 and July 7, 1967, respectively.

On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity and as natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale8 on July 7, 1979, adjudicating among themselves the said homestead properties, and thereafter, conveying themto the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration of P 80,000.00.

On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said homestead properties against spouses Uy (later substituted by their heirs)before the RTC, docketed as Civil Case No.96-28, assailing the validity of the sale for having been sold within the prohibited period. Thecomplaint was later amended to include Eutropia and Victoriaas additional plaintiffs for having been excluded and deprived of their legitimes as childrenof Anunciacion from her first marriage.

In their amended answer with counterclaim, the heirs of Uy countered that the sale took place beyond the 5-year prohibitory period from the issuance of the homestead patents. They also denied knowledge of Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and sale of the subject properties, and interposed further the defenses of prescription and laches.

The RTC Ruling

On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale occurred beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria were deprived of their hereditary rights and that Enrique had no judicial authority to sell the shares of his minor children, Rosa and Douglas.

Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who claimed possession of the subject properties for 17 years, holding that co-ownership rights are imprescriptible.

The CA Ruling

On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no knowledge of the extrajudicial settlement and sale of the subject properties and as such, were not bound by it, the CA found it unconscionable to permit the annulment of the sale considering spouses Uy’s possession thereof for 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997, ormore than two years fromknowledge of their exclusion as heirs in 1994 when their stepfather died. It, however, did not preclude the excluded heirs from recovering their legitimes from their co-heirs.

Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding with respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of their respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be minors at that time, they were deemed to have ratified the sale whenthey failed to question it upon reaching the age of majority.Italso found laches to have set in because of their inaction for a long period of time.

The Issues

In this petition, petitioners imputeto the CA the following errors:

I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND VICTORIA WERE CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;

II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA AND DOUGLAS, THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and

III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.

The Ruling of the Court

The petitionis meritorious.

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion from her first and second marriages with Gonzalo and Enrique, respectively, and consequently, are entitled to inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which read:

ART. 979. Legitimate children and their descendants succeed the parents and other ascendants, without distinction as to sex or age, and even if they should come from different marriages.

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ART. 980. The children of the deceased shall always inherit from him in their own right, dividing the inheritance in equal shares.

As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired their respective inheritances,9 entitling them to their pro indiviso shares in her whole estate, as follows:

Enrique 9/16 (1/2 of the conjugal assets + 1/16)

Eutropia 1/16

Victoria 1/16

Napoleon 1/16

Alicia 1/16

Visminda 1/16

Rosa 1/16

Douglas 1/16

Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia and Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly

represented therein, the settlement was not valid and binding uponthem and consequently, a total nullity.

Section 1, Rule 74 of the Rules of Court provides:

SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x

The fact of the extrajudicial settlement or administration shall be published in a newspaper of general circulation in the manner provided in the next succeeding section; but no extrajudicial settlement shall be binding upon any person who has not participated therein or had no notice thereof. (Underscoring added)

The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v. Segura,10 thus:

It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null and void as far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in the present case was invalid because it excluded six of the nine heirs who were entitled to equal shares in the partitioned property. Under the rule "no extrajudicial settlement shall be binding upon any person who has not participated therein or had no notice thereof." As the partition was a total nullity and did not affect the excluded heirs, it was not correct for the trial court to hold that their right to challenge the partition had prescribed after two years from its execution…

However, while the settlement of the estate is null and void, the subsequent sale of the subject propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the respondents isvalid but only with respect to their proportionate shares therein.It cannot be denied that these heirs have acquired their respective shares in the properties of Anunciacion from the moment of her death11and that, as owners thereof, they can very well sell their undivided share in the estate.12

With respect to Rosa and Douglas who were minors at the time of the execution of the settlement and sale, their natural guardian and father, Enrique, represented them in the transaction. However, on the basis of the laws prevailing at that time, Enrique was merely clothed with powers of administration and bereft of any authority to dispose of their 2/16 shares in the estate of their mother, Anunciacion.

Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the settlement and sale, provide:

ART. 320. The father, or in his absence the mother, is the legal administrator of the property pertaining to the child under parental authority. If the property is worth more than two thousand pesos, the father or mother shall give a bond subject to the approval of the Court of First Instance.

ART. 326. When the property of the child is worth more than two thousand pesos, the father or mother shall be considered a guardian of the child’s property, subject to the duties and obligations of guardians under the Rules of Court.

Corollarily, Section 7, Rule 93 of the Rules of Court also provides:

SEC. 7. Parents as Guardians. – When the property of the child under parental authority is worth two thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be his legal guardian. When the property of the child is worth more than two thousand pesos, the father or the mother shall be considered guardian of the child’s property, with the duties and obligations of guardians under these Rules, and shall file the petition required by Section 2 hereof. For good reasons, the court may, however, appoint another suitable persons.

Administration includes all acts for the preservation of the property and the receipt of fruits according to the natural purpose of the thing. Any act of disposition or alienation, or any reduction in the substance of the patrimony of child, exceeds the limits of administration.13 Thus, a father or mother, as the natural guardian of the minor under parental authority, does not have the power to dispose or encumber the property of the latter. Such power is granted by law only to a judicial guardian of the ward’s property and even then only with courts’ prior approval secured in accordance with the proceedings set forth by the Rules of Court.14

Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the proper judicial authority, unless ratified by them upon reaching the age of majority,15 is unenforceable in accordance with Articles 1317 and 1403(1) of the Civil Code which provide:

ART. 1317. No one may contract in the name of another without being authorized by the latter or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party.

ART. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

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Ratification means that one under no disability voluntarily adopts and gives sanction to some unauthorized act or defective proceeding, which without his sanction would not be binding on him. It is this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore unauthorized, and becomes the authorized act of the party so making the ratification.16 Once ratified, expressly or impliedly such as when the person knowingly received benefits from it, the contract is cleansed from all its defects from the moment it was constituted,17 as it has a retroactive effect.

Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with absolute deed of sale. In Napoleon and Rosa’s Manifestation18 before the RTC dated July 11, 1997,they stated:

"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was

voluntary and freely made by all of us and therefore the sale was absolutely valid and enforceable as far as we all plaintiffs in this case are concerned;" (Underscoring supplied)

In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:

"That we are surprised that our names are included in this case since we do not have any intention to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we respect and acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale dated July 7, 1979;" (Underscoring supplied)

Clearly, the foregoing statements constitutedratification of the settlement of the estate and the subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing the conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same, however, is not true with respect to Douglas for lack of evidence showing ratification.

Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in the homestead properties have effectivelybeen disposed in favor of spouses Uy. "A person can only sell what he owns, or is authorized to sell and the buyer can as a consequence acquire no more than what the sellercan legally transfer."20 On this score, Article 493 of the Civil Codeis relevant, which provides:

Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership.

Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the homestead properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16 shares. They were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an implied constructive trust for the latter’s benefit, conformably with Article 1456 of the Civil Code which states:"if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes." As such, it is only fair, just and equitable that the amount paid for their shares equivalent to P 5,000.0021 each or a total of P 15,000.00 be returned to spouses Uy with legal interest.

On the issue of prescription, the Court agrees with petitioners that the present action has not prescribed in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the ruling of the CA, the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the subject estate. Besides, an "action or defense for the declaration of the inexistence of a contract does not prescribe" in accordance with Article 1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time the cause of action accrues,22 which is from the time of actual notice in case of unregistered deed.23 In this case, Eutropia, Victoria and Douglas claimed to have knowledge of the extrajudicial settlement

with sale after the death of their father, Enrique, in 1994 which spouses Uy failed to refute. Hence, the complaint filed in 1997 was well within the prescriptive period of 10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010 Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri, Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as the LAWFUL OWNERSof the 3/16 portions of the subject homestead properties, covered by Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348); and

4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria and Douglas in the total amount of P 15,000.00, with legal interest at 6% per annum computed from the time of payment until finality of this decision and 12% per annum thereafter until fully paid.

No pronouncement as to costs.

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, 4found 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;

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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.

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After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorney's fees on its counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable compensation for the use of areas not covered by the contract (sic) of lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal interest from July 31, 1978; P70,000 00 per month as reasonable compensation for the use of the premises covered by the contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until plaintiff vacates the premises plus legal interest from June 1, 1987; P55,000.00 per month as reasonable compensation for the use of the premises covered by the contract of lease dated March 31, 1969 from March 30, 1989 until plaintiff vacates the premises plus legal interest from March 30, 1989; and P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming rights under these contracts are directed to 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. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or to sell a determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a consideration distinct from the price." That "unilateral promise to buy or to sell a determinate thing for a price certain" is called an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the

proposal must be certain as to the object, the price and other essential terms of the contract (Art. 1319, Civil Code).

Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive option to purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324 and 1479, second paragraph, of the Civil Code. Although the provision is certain as to the object (the sale of the leased premises) the price for which the object is to be sold is not stated in the provision Otherwise stated, the questioned stipulation is not by itself, an "option" or the "offer to sell" because the clause does not specify the price for the subject property.

Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally categorized as an option, it is, nevertheless, a valid and binding stipulation. What the trial court failed to appreciate was the intention of the parties behind the questioned proviso.

xxx xxx xxx

The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees have recognized that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation was intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should decide, during the term of the lease, to sell the leased property. This intention of the parties is achieved in two ways in accordance with the stipulation. The first is by giving Mayfair "30-days exclusive option to purchase" the leased property. The second is, in case Mayfair would opt not to purchase the leased property, "that the purchaser (the new owner of the leased property) shall recognize the lease and be bound by all the terms and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-days exclusive option to purchase the (leased premises)," was meant to provide Mayfair the opportunity to purchase and acquire the leased property in the event that Carmelo should decide to dispose of the property. In order to realize this intention, the implicit obligation of Carmelo once it had decided to sell the leased property, was not only to notify Mayfair of such decision to sell the property, but, more importantly, to make an offer to sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer, before offering to sell or selling the leased property to third parties. The right vested in Mayfair is analogous to the right of first refusal, which means that Carmelo should have offered the sale of the leased premises to Mayfair before offering it to other parties, or, if Carmelo should receive any offer from third parties to purchase the leased premises, then Carmelo must first give Mayfair the opportunity to match that offer.

In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:

Q Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the property and having the offer we decided to make an offer to Henry Yang on a first-refusal basis. (TSN November 8, 1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974 can you remember exactly what you have told him in connection with that matter, Mr. Pascal?

A More or less, I told him that I received an offer from another party to buy the property and I was offering him first choice of the enter property. (TSN, November 29, 1983, p. 18).

We rule, therefore, that the foregoing interpretation best renders effectual the intention of the 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 non-condominium nature of the buildings, the sale would be valid and capable of being performed. A sale limited to the leased premises only, if hypothetically assumed, would have brought into operation the provisions of co-

ownership under which Mayfair would have become the exclusive owner of the leased premises and at the same time a co-owner with Carmelo of the 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 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 Parañaque, 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 optioner-offeror, 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.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 182435 August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON, ERIC BA YLON, FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners, vs. FLORANTE BA YLON, Respondent.

VILLARAMA, JR.,*

D E C I S I O N

REYES, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul and set aside the Decision1 dated October 26, 2007 rendered by the Court of Appeals (CA) in CA-G.R. CV No. 01746. The assailed decision partially reversed and set aside the Decision2 dated October 20, 2005 issued ~y the Regional Trial Court (RTC), Tan jay City, Negros Oriental, Branch 43 in Civil Case No. 11657.

The Antecedent Facts

This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon (Spouses Baylon) who died on November 7, 1961 and May 5, 1974, respectively.3 At the time of their death, Spouses Baylon were survived by their legitimate children, namely, Rita Baylon (Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).

Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11, 1981 and was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate on July 8, 1989 and was survived by herein respondent Florante Baylon (Florante), his child from his first marriage, as well as by petitioner Flora Baylon, his second wife, and their legitimate children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and Ma. Ruby, all surnamed Baylon.

On July 3, 1996, the petitioners filed with the RTC a Complaint4 for partition, accounting and damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their lifetime, owned 43 parcels of land5 all situated in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita took possession of the said parcels of land and appropriated for herself the income from the same. Using the income produced by the said parcels of land, Rita allegedly purchased two parcels of land, Lot No. 47096 and half of Lot No. 4706,7situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said parcels of land.

In their Answer,8 Florante, Rita and Panfila asserted that they and the petitioners co-owned 229 out of the 43 parcels of land mentioned in the latter’s complaint, whereas Rita actually owned 10 parcels of land10 out of the 43 parcels which the petitioners sought to partition, while the remaining 11 parcels of land are separately owned by Petra Cafino Adanza,11 Florante,12 Meliton Adalia,13 Consorcia Adanza,14 Lilia15 and Santiago Mendez.16Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her own money. They denied that Rita appropriated solely for herself the income of the estate of Spouses Baylon, and expressed no objection to the partition of the estate of Spouses Baylon, but only with respect to the co-owned parcels of land.

During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997, conveyed Lot No. 4709 and half of Lot No. 4706 to Florante. On July 16, 2000, Rita died intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners filed a Supplemental Pleading17 dated February 6, 2002, praying that the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of the Civil Code. They further alleged that Rita was already sick and very weak when the said Deed of Donation was supposedly executed and, thus, could not have validly given her consent thereto.

Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of the Civil Code applies only when there is already a prior judicial decree on who between the contending parties actually owned the properties under litigation.18

The RTC Decision

On October 20, 2005, the RTC rendered a Decision,19 the decretal portion of which reads:

Wherefore judgment is hereby rendered:

(1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14, 16, 17, 18, 26, 29, 30, 33, 34, 35, 36, 40 and 41 described in the complaint;

(2) directing that the above mentioned parcels of land be partitioned among the heirs of Florentino Baylon and Maximina Baylon;

(3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6, 11, 12, 20, 24, 27, 31, 32, 39 and 42 and directing that it shall be partitioned among her heirs who are the plaintiffs and defendant in this case;

(4) declaring the donation inter vivos rescinded without prejudice to the share of Florante Baylon to the estate of Rita Baylon and directing that parcels nos. 1 and 2 paragraph V of the complaint be included in the division of the property as of Rita Baylon among her heirs, the parties in this case;

(5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37.

Considering that the parties failed to settle this case amicably and could not agree on the partition, the parties are directed to nominate a representative to act as commissioner to make the partition. He shall immediately take [his] oath of office upon [his] appointment. The commissioner shall make a report of all the proceedings as to the partition within fifteen (15) days from the completion of this partition. The parties are given ten (10) days within which to object to the report after which the Court shall act on the commissioner report.

SO ORDERED.20 (Emphasis ours)

The RTC held that the death of Rita during the pendency of the case, having died intestate and without any issue, had rendered the issue of ownership insofar as parcels of land which she claims as her own moot since the parties below are the heirs to her estate. Thus, the RTC regarded Rita as the owner of the said 10 parcels of land and, accordingly, directed that the same be partitioned among her heirs. Nevertheless, the RTC rescinded the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. In rescinding the said donation inter vivos, the RTC explained that:

However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante Baylon by way of donation inter vivos, the plaintiffs in their supplemental pleadings (sic) assailed the same to be rescissible on the ground that it was entered into by the defendant Rita Baylon without the knowledge and approval of the litigants [or] of competent judicial authority. The subject parcels of lands are involved in the case for which plaintiffs have asked the Court to partition the same among the heirs of Florentino Baylon and Maximina Elnas.

Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the plaintiffs’ right to succeed to the estate of Rita Baylon in case of death considering that as testified by Florante Baylon, Rita Baylon was very weak and he tried to give her vitamins x x x. The donation inter vivos executed by Rita Baylon in favor of Florante Baylon is rescissible for the reason that it refers to the parcels of land in litigation x x x without the knowledge and approval of the plaintiffs or of this Court. However, the rescission shall not affect the share of Florante Baylon to the estate of Rita Baylon.21

Florante sought reconsideration of the Decision dated October 20, 2005 of the RTC insofar as it rescinded the donation of Lot No. 4709 and half of Lot No. 4706 in his favor.22 He asserted that, at the time of Rita’s death on July 16, 2000, Lot No. 4709 and half of Lot No. 4706 were no longer part of her estate as the same had already been conveyed to him through a donation inter vivos three years earlier. Thus, Florante maintained that Lot No. 4709 and half of Lot No. 4706 should not be included in the properties that should be partitioned among the heirs of Rita.

On July 28, 2006, the RTC issued an Order23 which denied the motion for reconsideration filed by Florante.

The CA Decision

On appeal, the CA rendered a Decision24 dated October 26, 2007, the dispositive portion of which reads:

WHEREFORE, the Decision dated October 20, 2005 and Order dated July 28, 2006 are REVERSEDand SET ASIDE insofar as they decreed the rescission of the Deed of Donation dated July 6, 1997 and the inclusion of lot no. 4709 and half of lot no. 4706 in the estate of Rita Baylon. The case isREMANDED to the trial court for the determination of ownership of lot no. 4709 and half of lot no. 4706.

SO ORDERED.25

The CA held that before the petitioners may file an action for rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon and not to Rita. Until then, the CA asserted, an action for rescission is premature. Further, the CA ruled that the petitioners’ action for rescission cannot be joined with their action for partition, accounting and damages through a mere supplemental pleading. Thus:

If Lot No. 4709 and half of Lot No. 4706 belonged to the Spouses’ estate, then Rita Baylon’s donation thereof in favor of Florante Baylon, in excess of her undivided share therein as co-heir, is void. Surely, she could not have validly disposed of something she did not own. In such a case, an action for rescission of the donation may, therefore, prosper.

If the lots, however, are found to have belonged exclusively to Rita Baylon, during her lifetime, her donation thereof in favor of Florante Baylon is valid. For then, she merely exercised her ownership right to dispose of what legally belonged to her. Upon her death, the lots no longer form part of her estate as their ownership now pertains to Florante Baylon. On this score, an action for rescission against such donation will not prosper. x x x.

Verily, before plaintiffs-appellees may file an action for rescission, they must first obtain a favorable judicial ruling that lot no. 4709 and half of lot no. 4706 actually belonged to the estate of Spouses Florentino and Maximina Baylon, and not to Rita Baylon during her lifetime. Until then, an action for rescission is premature. For this matter, the applicability of Article 1381, paragraph 4, of the New Civil Code must likewise await the trial court’s resolution of the issue of ownership.

Be that as it may, an action for rescission should be filed by the parties concerned independent of the proceedings below. The first cannot simply be lumped up with the second through a mere supplemental pleading.26 (Citation omitted)

The petitioners sought reconsideration27 of the Decision dated October 26, 2007 but it was denied by the CA in its Resolution28 dated March 6, 2008.

Hence, this petition.

Issue

The lone issue to be resolved by this Court is whether the CA erred in ruling that the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if there is already a judicial determination that the same actually belonged to the estate of Spouses Baylon.

The Court’s Ruling

The petition is partly meritorious.

Procedural Matters

Before resolving the lone substantive issue in the instant case, this Court deems it proper to address certain procedural matters that need to be threshed out which, by laxity or otherwise, were not raised by the parties herein.

Misjoinder of Causes of Action

The complaint filed by the petitioners with the RTC involves two separate, distinct and independent actions – partition and rescission. First, the petitioners raised the refusal of their co-heirs, Florante, Rita and Panfila, to partition the properties which they inherited from Spouses Baylon. Second, in their supplemental pleading, the petitioners assailed the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of Florante pendente lite.

The actions of partition and rescission cannot be joined in a single action.

By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two or more demands or rights of action in one action, the statement of more than one cause of action in a declaration. It is the union of two or more civil causes of action, each of which could be made the basis of a separate suit, in the same complaint, declaration or petition. A plaintiff may under certain circumstances join several distinct demands, controversies or rights of action in one declaration, complaint or petition.29

The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties and subject matter are to be dealt with by effecting in one action a complete determination of all matters in controversy and litigation between the parties involving one subject matter, and to expedite the disposition of litigation at minimum cost. The provision should be construed so as to avoid such multiplicity, where possible, without prejudice to the rights of the litigants.30

Nevertheless, while parties to an action may assert in one pleading, in the alternative or otherwise, as many causes of action as they may have against an opposing party, such joinder of causes of action is subject to the condition, inter alia, that the joinder shall not include special civil actions governed by special rules.31

Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners could not be joined with the action for the rescission of the said donation inter vivos in favor of Florante. Lest it be overlooked, an action for partition is a special civil action governed by Rule 69 of the Rules of Court while an action for rescission is an ordinary civil action governed by the ordinary rules of civil procedure. The variance in the procedure in the special civil action of partition and in the ordinary civil action of rescission precludes their joinder in one complaint or their being tried in a single proceeding to avoid confusion in determining what rules shall govern the conduct of the proceedings as well as in the determination of the presence of requisite elements of each particular cause of action.32

A misjoined cause of action, if not severed upon motion of a party or by the court sua sponte, may be

adjudicated by the court together with the other causes of action.

Nevertheless, misjoinder of causes of action is not a ground for dismissal. Indeed, the courts have the power, acting upon the motion of a party to the case or sua sponte, to order the severance of the misjoined cause of action to be proceeded with separately.33 However, if there is no objection to the improper joinder or the court did not motu proprio direct a severance, then there exists no bar in the simultaneous adjudication of all the erroneously joined causes of action. On this score, our disquisition in Republic of the Philippines v. Herbieto34 is instructive, viz:

This Court, however, disagrees with petitioner Republic in this regard. This procedural lapse committed by the respondents should not affect the jurisdiction of the MTC to proceed with and hear their application for registration of the Subject Lots.

x x x x

Considering every application for land registration filed in strict accordance with the Property Registration Decree as a single cause of action, then the defect in the joint application for registration filed by the respondents with the MTC constitutes a misjoinder of causes of action and parties. Instead of a single or joint application for registration, respondents Jeremias and David, more appropriately, should have filed separate applications for registration of Lots No. 8422 and 8423, respectively.

Misjoinder of causes of action and parties do not involve a question of jurisdiction of the court to hear and proceed with the case. They are not even accepted grounds for dismissal thereof. Instead, under the Rules of Court, the misjoinder of causes of action and parties involve an implied admission of the court’s jurisdiction. It acknowledges the power of the court, acting upon the motion of a party to the case or on its own initiative, to order the severance of the misjoined cause of action, to be proceeded with separately (in case of misjoinder of causes of action); and/or the dropping of a party and the severance of any claim against said misjoined party, also to be proceeded with separately (in case of misjoinder of parties).35 (Citations omitted)

It should be emphasized that the foregoing rule only applies if the court trying the case has jurisdiction over all of the causes of action therein notwithstanding the misjoinder of the same. If the court trying the case has no jurisdiction over a misjoined cause of action, then such misjoined cause of action has to be severed from the other causes of action, and if not so severed, any adjudication rendered by the court with respect to the same would be a nullity.

Here, Florante posed no objection, and neither did the RTC direct the severance of the petitioners’ action for rescission from their action for partition. While this may be a patent omission on the part of the RTC, this does not constitute a ground to assail the validity and correctness of its decision. The RTC validly adjudicated the issues raised in the actions for partition and rescission filed by the petitioners.

Asserting a New Cause of Action in a Supplemental Pleading

In its Decision dated October 26, 2007, the CA pointed out that the said action for rescission should have been filed by the petitioners independently of the proceedings in the action for partition. It opined that the action for rescission could not be lumped up with the action for partition through a mere supplemental pleading.

We do not agree.

A supplemental pleading may raise a new cause of action as long as it has some relation to the original cause of action set forth in the original complaint.

Section 6, Rule 10 of the Rules of Court reads:

Sec. 6. Supplemental Pleadings. – Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit him to serve a supplemental pleading setting forth transactions, occurrences or events which have happened since the date of the pleading sought to be supplemented. The adverse party may plead thereto within ten (10) days from notice of the order admitting the supplemental pleading.

In Young v. Spouses Sy,36 this Court had the opportunity to elucidate on the purpose of a supplemental pleading. Thus:

As its very name denotes, a supplemental pleading only serves to bolster or add something to the primary pleading. A supplement exists side by side with the original. It does not replace that which it supplements. Moreover, a supplemental pleading assumes that the original pleading is to stand and that the issues joined with the original pleading remained an issue to be tried in the action. It is but a continuation of the complaint. Its usual office is to set up new facts which justify, enlarge or change the kind of relief with respect to the same subject matter as the controversy referred to in the original complaint.

The purpose of the supplemental pleading is to bring into the records new facts which will enlarge or change the kind of relief to which the plaintiff is entitled; hence, any supplemental facts which further develop the original right of action, or extend to vary the relief, are available by way of supplemental complaint even though they themselves constitute a right of action.37 (Citations omitted and emphasis ours)

Thus, a supplemental pleading may properly allege transactions, occurrences or events which had transpired after the filing of the pleading sought to be supplemented, even if the said supplemental facts constitute another cause of action.

Admittedly, in Leobrera v. Court of Appeals,38 we held that a supplemental pleading must be based on matters arising subsequent to the original pleading related to the claim or defense presented therein, and founded on the same cause of action. We further stressed therein that a supplemental pleading may not be used to try a new cause of action.

However, in Planters Development Bank v. LZK Holdings and Development Corp.,39 we clarified that, while a matter stated in a supplemental complaint should have some relation to the cause of action set forth in the original pleading, the fact that the supplemental pleading technically states a new cause of action should not be a bar to its allowance but only a matter that may be considered by the court in the exercise of its discretion. In such cases, we stressed that a broad definition of "cause of action" should be applied.

Here, the issue as to the validity of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of Florante is a new cause of action that occurred after the filing of the original complaint. However, the petitioners’ prayer for the rescission of the said donation inter vivos in their supplemental pleading is germane to, and is in fact, intertwined with the cause of action in the partition case. Lot No. 4709 and half of Lot No. 4706 are included among the properties that were sought to be partitioned.

The petitioners’ supplemental pleading merely amplified the original cause of action, on account of the gratuitous conveyance of Lot No. 4709 and half of Lot No. 4706 after the filing of the original complaint and prayed for additional reliefs, i.e., rescission. Indeed, the petitioners claim that the said lots form part of the estate of Spouses Baylon, but cannot be partitioned unless the gratuitous conveyance of the same is rescinded. Thus, the principal issue raised by the petitioners in their original complaint remained the same.

Main Issue: Propriety of Rescission

After having threshed out the procedural matters, we now proceed to adjudicate the substantial issue presented by the instant petition.

The petitioners assert that the CA erred in remanding the case to the RTC for the determination of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to Article 1381(4) of the Civil Code.

In his Comment,40 Florante asserts that before the petitioners may file an action for rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for rescission would be premature.

The petitioners’ contentions are well-taken.

The resolution of the instant dispute is fundamentally contingent upon a determination of whether the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may be rescinded pursuant to Article 1381(4) of the Civil Code on the ground that the same was made during the pendency of the action for partition with the RTC.

Rescission is a remedy to address the damage or injury caused to the contracting parties or third persons.

Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if it should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract.41 It is a remedy to make ineffective a contract, validly entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors.42

Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded.

The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following: first, those which are rescissible because of lesion or prejudice;43 second, those which are rescissible on account of fraud or bad faith;44 and third, those which, by special provisions of law,45 are susceptible to rescission.46

Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code.

Contracts which are rescissible due to fraud or bad faith include those which involve things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code provides:

Art. 1381. The following contracts are rescissible:

x x x x

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following: first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of litigation; and second, the said contract was entered into without the knowledge and approval of the litigants or of a competent judicial authority. As long as the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said contract.

The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case and/or any fraudulent act which they may commit with respect to the thing subject of litigation.

When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court shall render. The parties to the case are therefore expected, in deference to the court’s exercise of jurisdiction over the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise render the impending decision therein ineffectual.

There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority.

Further, any disposition of the thing subject of litigation or any act which tends to render inutile the court’s impending disposition in such case, sans the knowledge and approval of the litigants or of

the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of the parties in a case relative to the thing subject of litigation and bind them to such determination.

It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership.

This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of the other litigants pursuant to Article 1381(4) of the Civil Code.

Here, contrary to the CA’s disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to Florante.

Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter vivos of the same being merely an exercise of ownership, Rita’s failure to inform and seek the approval of the petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil Code.

Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation.

In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners’ right to institute the action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTC’s determination as to the ownership of the said parcels of land.

It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible effectivity of the impending judgment by a court with respect to the thing subject of litigation. It seeks to protect the binding effect of a court’s impending adjudication vis-à-vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a

condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted.

Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of litigation is judicially determined, there is the possibility that the same may had already been conveyed to third persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned.

Even if the donation inter vivos is validly rescinded, a determination as to the ownership of the subject parcels of land is still necessary.

Having established that the RTC had aptly ordered the rescission of the said donation inter vivos in favor of Florante, the issue that has to be resolved by this Court is whether there is still a need to determine the ownership of Lot No. 4709 and half of Lot No. 4706.

In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706, the RTC reasoned that the parties in the proceedings before it constitute not only the surviving heirs of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier, Rita died intestate during the pendency of the proceedings with the RTC without any issue, leaving the parties in the proceedings before the RTC as her surviving heirs. Thus, the RTC insinuated, a definitive determination as to the ownership of the said parcels of land is unnecessary since, in any case, the said parcels of land would ultimately be adjudicated to the parties in the proceedings before it.

We do not agree.

Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706, be it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and Rita. However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot No. 4709 and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said parcels of land indeed form part of the estate of Spouses Baylon.

It should be stressed that the partition proceedings before the RTC only covers the properties co-owned by the parties therein in their respective capacity as the surviving heirs of Spouses Baylon. Hence, the authority of the RTC to issue an order of partition in the proceedings before it only affects those properties which actually belonged to the estate of Spouses Baylon.

In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are indeed exclusively owned by Rita, then the said parcels of land may not be partitioned simultaneously with the other properties subject of the partition case before the RTC. In such case, although the parties in the case before the RTC are still co-owners of the said parcels of land, the

RTC would not have the authority to direct the partition of the said parcels of land as the proceedings before it is only concerned with the estate of Spouses Baylon.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY GRANTED. The Decision dated October 26, 2007 issued by the Court of Appeals in CA-G.R. CV No. 01746 is MODIFIED in that the Decision dated October 20, 2005 issued by the Regional Trial Court, Tanjay City, Negros Oriental, Branch 43 in Civil Case No. 11657, insofar as it decreed the rescission of the Deed of Donation dated July 6, 1997 is herebyREINSTATED. The case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709 and half of Lot No. 4706 in accordance with this Decision.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Baguio City

FIRST DIVISION

G.R. No. 144169 March 28, 200

KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE, petitioners, vs. COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM INSURANCE CO., INC.,respondents.

KAPUNAN, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the decision of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000 denying the motion for reconsideration of the aforesaid decision. The original complaint that is the subject matter of this case is an accion pauliana -- an action filed by Philam Insurance Company, Inc. (respondent Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng allegedly in fraud of creditors. The main issue for resolution is whether or not the action to rescind the donations has already prescribed. While the first paragraph of Article 1389 of the Civil Code states: "The action to claim rescission must be commenced within four years..." the question is, from which point or event does this prescriptive period commence to run?

The facts are as follows:

Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears that on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was covered by a marine insurance policy issued by American Home Insurance Company (respondent Philam's assured). M/V PRINCE ERlC, however, sank somewhere between Negros Island and Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the consignee. 1âwphi 1.nêt

Having been subrogated into the rights of the consignee, American Home instituted Civil Case No. 13357 in the Regional Trial Court (RTC) of Makati , Branch 147 to recover the money paid to the consignee, based on breach of contract of carriage. While the case was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was donated to Ray Steven. Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of land located in Butuan City, covered by TCT No. RT-12838. On the basis of said deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of Ray Steven and TCT No. RT-12838 was cancelled and in lieu thereof, TCT No. RT-21054 was issued in the name of Sandra Joy.

The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No.13357 on December 29, 1993, four years after the donations were made and the TCTs were registered in the donees' names. The decretal portion of the aforesaid decision reads:

"Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant, ordering the latter to pay the former:

1) the sum of P354,000.00 representing the amount paid by the plaintiff to the Philippine Agricultural Trading Corporation with legal interest at 12% from the time of the filing of the complaint in this case;

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

3) the costs.1

After the said decision became final and executory, a writ of execution was forthwith' issued on September 14, 1995. Said writ of execution however, was not served. An alias writ of execution was, thereafter, applied for and granted in October 1996. Despite earnest efforts, the sheriff found no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by counsel of respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution, they discovered that petitioner Khe Hong Cheng no longer had any property and that he had conveyed the subject properties to his children.

On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of Makati City, Branch 147, for the rescission of the deeds of donation executed by petitioner Khe Hong Cheng in favor of his children and for the nullification of their titles (Civil Case No.97-415). Respondent Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the aforesaid deeds in fraud of his creditors, including respondent Philam.2

Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on the ground that the action had already prescribed. They posited that the registration of the deeds of donation on December 27, 1989 constituted constructive notice and since the complaint a quo was filed only on February 25, 1997, or more than four (4) years after said registration, the action was already barred by prescription.3

Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's complaint had not yet prescribed. According to the trial court, the prescriptive period began to run only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357.4

On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam. The CA declared that the action to rescind the donations had not yet prescribed. Citing Articles 1381 and 1383 of the Civil Code, the CA basically ruled that the four year period to institute the action for rescission began to run only in January 1997, and not when the decision in the civil case became final and executory on December 29, 1993. The CA reckoned the accrual of respondent Philam's cause of action on January 1997, the time when it first learned that the judgment award could not be satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more properties in his name. Prior thereto, respondent Philam had not yet exhausted all legal means for the satisfaction of the decision in its favor, as prescribed under Article 1383 of the Civil Code.5

The Court of Appeals thus denied the petition for certiorari filed before it, and held that the trial court did not commit any error in denying petitioners' motion to dismiss. Their motion for reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000.

Petitioners now assail the aforesaid decision and resolution of the CA alleging that:

I

PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION WHEN IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE GROUND OF PRESCRIPTION.

II

PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO BUTUAN CITY IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO SATISFY THE JUDGMENT IN CIVIL CASE NO.13357 AND FOUND OUT THAT AS EARLY AS DEC. 20, 1989, PETITIONERS KHE CHENG EXECUTED THE DEEDS OF DONATIONS IN FAVOR OF HIS CO-PETITIONERS THAT THE ACTION FOR RESCISSION ACCRUED BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE DONATIONS WERE REGISTERED WITH THE REGISTER OF DEEDS IN DECEMBER 1989, AND WHEN THE COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE ALREADY LAPSED AND THEREFORE, IT HAS ALREADY PRESCRIBED.6

Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject deeds of donation commence to run?

The petition is without merit.

Article 1389 of the Civil Code simply provides that, "The action to claim rescission must be commenced within four years." Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e., from the moment the cause of action accrues, therefore, applies. Article 1150 of the Civil Code is particularly instructive:

Art. 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the starting point for the computation of the prescriptive period for the action.7 Article 1383 of the Civil Code provides as follows:

Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of only after all other legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following requisites must concur:

1) That the plaintiff asking for rescission has a credit prior to, the alienation, although demandable later; 2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That the third person who received the property conveyed, if by onerous title, has been an accomplice in the fraud.8 (Emphasis ours)

We quote with approval the following disquisition of the CA on the matter:

An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for the satisfaction of his claim against the debtor other than an accion pauliana. The accion pauliana is an action of a last resort. For as long as the creditor still has a remedy at law for the enforcement of his claim against the debtor, the creditor will not have any cause of action against the creditor for rescission of the contracts entered into by and between the debtor and another person or persons. Indeed, an accion paulianapresupposes a judgment and the issuance by the trial court of a writ of execution for the satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the judgment of the court. It presupposes that the creditor has exhausted the property of the debtor. The date of the decision of the trial court against the debtor is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor.9

Petitioners, however, maintain that the cause of action of respondent Philam against them for the rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner Khe Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent Philam allegedly had constructive knowledge of the execution of said deeds under Section 52 of Presidential Decree No. 1529, quoted infra, as follows:

Section 52. Constructive knowledge upon registration. - Every conveyance, mortgage, lease, lien, attachment, order, judgment, instrument or entry affecting registered land shall, if registered, filed or entered in the Office of the Register of Deeds for the province or city where the land to which it relates lies, be constructive notice to all persons from the time of such registering, filing, or entering.

Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is misplaced, for in no way does this imply that the specific provisions of the former may be all together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence. It would likewise violate the third requisite to file an action for rescission of an allegedly fraudulent conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim.

An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the debtor: The date of the decision of the trial court is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor.

Tolentino, a noted civilist, explained:

"xxx[T]herefore, credits with suspensive term or condition are excluded, because the accion paulianapresupposes a judgment and unsatisfied execution, which cannot exist when the debt is not yet demandable at the time the rescissory action is brought. Rescission is a subsidiary action, which presupposes that the creditor has exhausted the property of the debtor which is impossible in credits which cannot be enforced because of a suspensive term or condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory with retroactive effect to the date when the credit was constituted."10

These principles were reiterated by the Court when it explained the requisites of an accion pauliana in greater detail, to wit:

"The following successive measures must be taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt from execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana). Without availing of the first and second remedies, i.e.. exhausting the properties of the debtor or subrogating themselves in Francisco Bareg's transmissible rights and actions. petitioners simply: undertook the third measure and filed an action for annulment of sale. This cannot be done."11 (Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of the accion pauliana on the basis of lack of cause of action:

"In this case, plaintiffs appellants had not even commenced an action against defendants-appellees Bareng for the collection of the alleged indebtedness, Plaintiffs-appellants had not even tried to exhaust the property of defendants-appellees Bareng, Plaintiffs-appellants, in

seeking the rescission of the contracts of sale entered into between defendants-appellees, failed to show and prove that defendants-appellees Bareng had no other property, either at the time of the sale or at the time this action was filed, out of which they could have collected this (sic) debts." (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court’s judgment would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27, 1989, such complaint would have been dismissed for being premature. Not only were all other legal remedies for the enforcement of respondent Philam's claims not yet exhausted at the time the needs of donation were executed and registered. Respondent Philam would also not have been able to prove then that petitioner Khe Hong Cheng had no more property other than those covered by the subject deeds to satisfy a favorable judgment by the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he had reserved to himself property sufficient to answer for his debts contracted prior to this date:

"That the DONOR further states, for the same purpose as expressed in the next preceding paragraph, that this donation is not made with the object of defrauding his creditors having reserved to himself property sufficient to answer his debts contracted prior to this date".12

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any properties in his name. It was only then that respondent Philam's action for rescission of the deeds of donation accrued because then it could be said that respondent Philam had exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its action for rescission of the subject deeds clearly had not yet prescribed. 1âwphi 1.nêt

A final point. Petitioners now belatedly raise on appeal the defense of improper venue claiming that respondent Philam's complaint is a real action and should have been filed with the RTC of Butuan City since the property subject matter or the donations are located therein. Suffice it to say that petitioners are already deemed to have waived their right to question the venue of the instant case. Improper venue should be objected to as follows 1) in a motion to dismiss filed within the time but before the filing of the answer;13 or 2) in the answer as an affirmative defense over which, in the discretion of the court, a preliminary hearing may be held as if a motion to dismiss had been filed.14 Having failed to either file a motion to dismiss on the ground of improper of venue or include the same as an affirmative defense in their answer, petitioners are deemed to have their right to object to improper venue.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.

SO ORDERED.

3. Voidable Contracts (Arts. 1390-1402, NCC)

Case:

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 139982 November 21, 2002

JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS ALTEA FRANCISCO; the heirs of late ARCADIO FRANCISCO, namely: CONCHITA SALANGSANG-FRANCISCO (surviving spouse), and his children namely: TEODULO S. FRANCISCO, EMILIANO S. FRANCISCO, MARIA THERESA S. FRANCISCO, PAULINA S. FRANCISCO, THOMAS S. FRANCISCO; PEDRO ALTEA FRANCISCO; CARINA FRANCISCO-ALCANTARA; EFREN ALTEA FRANCISCO; DOMINGA LEA FRANCISCO-REGONDON; BENEDICTO ALTEA FRANCISCO and ANTONIO ALTEA FRANCISCO), petitioner, vs. PASTOR HERRERA, respondent.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals, dated August 30, 1999, in CA-G.R. CV No. 47869, which affirmed in toto the judgment2 of the Regional Trial Court (RTC) of Antipolo City, Branch 73, in Civil Case No. 92-2267. The appellate court sustained the trial court’s ruling which: (a) declared null and void the deeds of sale of the properties covered by Tax Declaration Nos. 01-00495 and 01-00497; and (b) directed petitioner to return the subject properties to respondent who, in turn, must refund to petitioner the purchase price of P1,750,000.

The facts, as found by the trial court and affirmed by the Court of Appeals, are as follows:

Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land, one consisting of 500 sq. m. and another consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 01-00495 and 01-00497, respectively. Both were located at Barangay San Andres, Cainta, Rizal.3

On January 3, 1991, petitioner bought from said landowner the first parcel, covered by TD No. 01-00495, for the price of P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.

On March 12, 1991, petitioner bought the second parcel covered by TD No. 01-00497, for P750,000.

Contending that the contract price for the two parcels of land was grossly inadequate, the children of Eligio, Sr., namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to negotiate with petitioner to increase the purchase price. When petitioner refused, herein respondent then filed a complaint for annulment of sale, with the RTC of Antipolo City, docketed as Civil Case No. 92-2267. In his complaint, respondent claimed ownership over the second parcel, which is the

lot covered by TD No. 01-00497, allegedly by virtue of a sale in his favor since 1973. He likewise claimed that the first parcel, the lot covered by TD No. 01-00495, was subject to the co-ownership of the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died intestate on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged that the sale of the two lots was null and void on the ground that at the time of sale, Eligio, Sr. was already incapacitated to give consent to a contract because he was already afflicted with senile dementia, characterized by deteriorating mental and physical condition including loss of memory.

In his answer, petitioner as defendant below alleged that respondent was estopped from assailing the sale of the lots. Petitioner contended that respondent had effectively ratified both contracts of sales, by receiving the consideration offered in each transaction.

On November 14, 1994, the Regional Trial Court handed down its decision, the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, this court hereby orders that:

1. The deeds of sale of the properties covered by Tax Dec. Nos. 01-00495 and 01-00497 are declared null and void;

2. The defendant is to return the lots in question including all improvements thereon to the plaintiff and the plaintiff is ordered to simultaneously return to the defendant the purchase price of the lots sold totalling toP750,000.00 for lot covered by TD 01-00497 and P1,000,000.00 covered by TD 01-00495;

3. The court also orders the defendant to pay the cost of the suit.

<>4. The counter-claim of the defendant is denied for lack of merit.

SO ORDERED.4

Petitioner then elevated the matter to the Court of Appeals in CA-G.R. CV No. 47869. On August 30, 1999, however, the appellate court affirmed the decision of the Regional Trial Court, thus:

WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED in toto. Costs against defendant-appellant.

SO ORDERED.5

Hence, this petition for review anchored on the following grounds:

I. THE COURT OF APPEALS COMPLETELY IGNORED THE BASIC DIFFERENCE BETWEEN A VOID AND A MERELY VOIDABLE CONTRACT THUS MISSING THE ESSENTIAL SIGNIFICANCE OF THE ESTABLISHED FACT OF RATIFICATION BY THE RESPONDENT WHICH EXTINGUISHED WHATEVER BASIS RESPONDENT MAY HAVE HAD IN HAVING THE CONTRACT AT BENCH ANNULLED.

II. THE DECISION OF THE COURT OF APPEALS ON "SENILE DEMENTIA":

A. DISREGARDED THE FACTUAL BACKGROUND OF THE CASE;

B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND

C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING ERRONEOUS.

III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN FACT VIOLATED PETITIONERS’ RIGHT TO DUE PROCESS WHEN IT RULED THAT THE CONSIDERATION FOR THE QUESTIONED CONTRACTS WAS GROSSLY INADEQUATE.6

The resolution of this case hinges on one pivotal issue: Are the assailed contracts of sale void or merely voidable and hence capable of being ratified?

Petitioner contends that the Court of Appeals erred when it ignored the basic distinction between void and voidable contracts. He argues that the contracts of sale in the instant case, following Article 13907 of the Civil Code are merely voidable and not void ab initio. Hence, said contracts can be ratified. Petitioner argues that while it is true that a demented person cannot give consent to a contract pursuant to Article 1327,8 nonetheless the dementia affecting one of the parties will not make the contract void per se but merely voidable. Hence, when respondent accepted the purchase price on behalf of his father who was allegedly suffering from senile dementia, respondent effectively ratified the contracts. The ratified contracts then become valid and enforceable as between the parties.

Respondent counters that his act of receiving the purchase price does not imply ratification on his part. He only received the installment payments on his senile father’s behalf, since the latter could no longer account for the previous payments. His act was thus meant merely as a safety measure to prevent the money from going into the wrong hands. Respondent also maintains that the sales of the two properties were null and void. First, with respect to the lot covered by TD No. 01-00497, Eligio, Sr. could no longer sell the same because it had been previously sold to respondent in 1973. As to lot covered by TD No. 01-00495, respondent contends that it is co-owned by Eligio, Sr. and his children, as heirs of Eligio’s wife. As such, Eligio, Sr. could not sell said lot without the consent of his co-owners.

We note that both the trial court and the Court of Appeals found that Eligio, Sr. was already suffering from senile dementia at the time he sold the lots in question. In other words, he was already mentally incapacitated when he entered into the contracts of sale. Settled is the rule that findings of fact of the trial court, when affirmed by the appellate court, are binding and conclusive upon the Supreme Court.9

Coming now to the pivotal issue in this controversy. A void or inexistent contract is one which has no force and effect from the very beginning. Hence, it is as if it has never been entered into and cannot be validated either by the passage of time or by ratification. There are two types of void contracts: (1) those where one of the essential requisites of a valid contract as provided for by Article 131810 of the Civil Code is totally wanting; and (2) those declared to be so under Article 140911 of the Civil Code. By contrast, a voidable or annullable contract is one in which the essential requisites for validity under Article 1318 are present, but vitiated by want of capacity, error, violence, intimidation, undue influence, or deceit.

Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent of the parties, object certain as subject matter, and cause of the obligation established. Article 1327 provides that insane or demented persons cannot give consent to a contract. But, if an insane or demented person does enter into a contract, the legal effect is that the contract is voidable or annullable as specifically provided in Article 1390.12

In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with petitioner, but that the former’s capacity to consent was vitiated by senile dementia. Hence, we must rule that the assailed contracts are not void or inexistent per se; rather, these are contracts that are valid and binding unless annulled through a proper action filed in court seasonably.

An annullable contract may be rendered perfectly valid by ratification, which can be express or implied. Implied ratification may take the form of accepting and retaining the benefits of a contract.13 This is what happened in this case. Respondent’s contention that he merely received payments on behalf of his father merely to avoid their misuse and that he did not intend to concur with the contracts is unconvincing. If he was not agreeable with the contracts, he could have prevented petitioner from delivering the payments, or if this was impossible, he could have immediately instituted the action for reconveyance and have the payments consigned with the court. None of these happened. As found by the trial court and the Court of Appeals, upon learning of the sale, respondent negotiated for the increase of the purchase price while receiving the installment payments. It was only when respondent failed to convince petitioner to increase the price that the former instituted the complaint for reconveyance of the properties. Clearly, respondent was agreeable to the contracts, only he wanted to get more. Further, there is no showing that respondent returned the payments or made an offer to do so. This bolsters the view that indeed there was ratification. One cannot negotiate for an increase in the price in one breath and in the same breath contend that the contract of sale is void.

Nor can we find for respondent’s argument that the contracts were void as Eligio, Sr., could not sell the lots in question as one of the properties had already been sold to him, while the other was the subject of a co-ownership among the heirs of the deceased wife of Eligio, Sr. Note that it was found by both the trial court and the Court of Appeals that Eligio, Sr., was the "declared owner" of said lots. This finding is conclusive on us. As declared owner of said parcels of land, it follows that Eligio, Sr., had the right to transfer the ownership thereof under the principle of jus disponendi.

In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of the two lots in question were null and void.

WHEREFORE, the instant petition is GRANTED. The decision dated August 30, 1999 of the Court of Appeals in CA-G.R. CV No. 47869, affirming the decision of the Regional Trial Court in Civil Case No. 92-2267 is REVERSED. The two contracts of sale covering lots under TD No. 01-00495 and No. 01-00497 are hereby declared VALID. Costs against respondent.

SO ORDERED.

4. Unenforceable Contracts (Arts. 1403-1408, NCC)

Cases:

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-3784 October 17, 1952

ERNEST BERG, plaintiff-appellee, vs. MAGDALENA ESTATE, INC., defendant-appellant.

Claro M. Recto and Eusebio C. Encarnacion for appellant. Alva Hill, Tañada, Pelaez and Teehankee for appellee.

BAUTISTA ANGELO, J.:

This is an action for partition of the property known as Crystal Arcade situated in the City of Manila.

The complaint avers that plaintiff and defendant are co-owners of said property, the former being the owner of one-third interest and the latter of the remaining two-thirds. The division is asked because plaintiff and defendant are unable to agree upon the management of the property and upon the partition thereof.

Defendant answered setting up a special defense and a counterclaim. As a special defense, defendant claims that on September 22, 1943, it sold to plaintiff one-third of the property in litigation subject to the express condition that should either vendor or vendee decide to sell his or its undivided share, the party selling would grant to the other part first an irrevocable option to purchase the same at the seller's price. It avers that on January 1946 plaintiff fixed the sum of P200,000 as the price of said share and offered to sell it to defendant, which offer was accepted, and for the payment of said price plaintiff gave defendant a period of time which, including the extensions granted, would expire on May 31, 1947. Defendant claims that, in spite of the acceptance of the offer, plaintiff refused to accept the payment of the price, and for this refusal defendant suffered damages in the amount of P100,000. For these reasons, defendant asks for specific performance.

Plaintiff filed a reply setting forth therein that the transaction referred to by the defendant in its special defense relative to the property in litigation is not supported by any note or memorandum subscribed by the parties, as in fact no such note or memorandum has been made evidencing the transaction, for which reason, plaintiff claims, this transaction falls under the statute of frauds and cannot form the basis of the special defense invoked by the defendant.

After trial, at which the parties presented testimonial and documentary evidence, the lower court found for the plaintiff holding that no agreement has been reached between the parties relative to the purchase and sale of the property in question, and, recognizing the right of plaintiff to demand partition under the provisions of Rule 71 of the Rules of Court, it granted the relief prayed for in the complaint. Hence this appeal.

The pivotal issue to be determined is whether an agreement to sell has actually been reached between plaintiff and defendant of the share of the former in the property in litigation for the sum of P200,000, as claimed by defendants, or whether there have been merely negotiations between them which never ripened into an agreement, as claimed by plaintiff. And in the determination of this issue, the preliminary question to be threshed out is the point raised by plaintiff touching on the evidence submitted by defendant in the light of the principle underlying the statute of frauds.

It is an undisputed facts that since September 22, 1943, plaintiff and defendant were co owners pro indiviso of the property known as Crystal Arcade in the proportion of one-third interest belonging to the former and two-thirds to the latter. In the deed of sale executed by the parties on said date, they stipulated that, should either of them decide to sell his or her share, the other party will have an irrevocable option to purchase it at the seller's price. Then a disagreement ensued between the parties as to what really occurred concerning the deal.

Thus, while Berg claims that his negotiations with Hemady ended when an offer by the latter to the former to buy his interest for the sum of P350,000, Hemady on the other hand claims that Berg offered to sell it to him for P200,000 subject to the condition that the necessary permit be obtained from the United States Treasury Department.

It should be stated that, aside from the testimony of Berg and Hemady, no document has been presented evidencing that alleged agreement to sell, and so when defendant made attempts to prove, through the testimony of Hemady, that plaintiff made an offer to sell his interest to defendant for the sum of P200,000, the attempt met the vigorous opposition of plaintiff invoking the rule that such agreement can only be established by a contract in writing, or by a note or memorandum subscribed by the party sought to be charged, as prescribed by the statute of frauds. It was then that defendant submitted in evidence exhibits "3" and "4", contending that these documents, read in connection with the option to sell embodied in exhibit "1", constitute a written proof contemplated by said statute. The crux of this case, therefore, lies in the determination of whether said exhibits partake of the nature of a note or memorandum within the purview of said statute as contended by defendant.

It appears that right after the liberation of the Philippines, both Ernest Berg and K.H. Hemady were accused of collaboration for which reason the Treasury Department of the United States ordered the freezing of their properties under the law known as Trading with the Enemy Act. Under the provisions of this Act both Berg and Hemady could not sell or dispose of their properties without first securing the permit required by it, and so to comply this requirement, both Berg and Hemady filed separately an application with said Department for the purchase and sale of the property in litigation. These applications are the ones marked as exhibits "3" and "4". In the application exhibit "3", Ernest berg stated that he desires a license in order to sell his interest in the Crystal Arcade, Escolta, Manila, for P200,000 in cash to Magdalena Estate, Inc. asking at the same time for permission to place the amount in an account in his name or in the name of the company he represents and to apply the same from time to time to the payment of the obligations of Red Star Store Inc. In the application exhibit "4", defendant in turn stated, through its president K. H. Hemady, that it desires a license in order "to use a portion of the P400,000 requested as a loan from the National City Bank of New York, Manila, or from any other bank in Manila, together with funds to be collected from old and new sales of his real estate properties, for the purchase of the one-third (1/3) of the Crystal Arcade property in the Escolta, Manila, belonging to Mr. Ernest Berg."

It is now defendant's position that if the option granted in exhibit "1" (deed of sale containing the irrevocable option) is considered in relation to Berg's application exhibit "3" and defendant's application exhibit "4", these documents constitute a sufficient note or memorandum of the parties' alleged contract of purchase and sale within the purview of the statute of frauds. This claim is disputed by Ernest Berg, appellee herein. Which of these contentions is correct?

Before we proceed, it is important to state at this juncture some principles governing the meaning, extent and scope of the rule underlying the statute of frauds relative to the note or memorandum that may serve as proof to determine the existence of an oral contract or agreement contemplated by it, and for our purpose, it suffices for us to quote the following authorities:

No particular form of language or instrument is necessary to constitute a memorandum or note in writing under the statute of frauds; any document or writing, formal or informal, written either for the purpose of furnishing evidence of the contract or for another purpose, which satisfies all the requirements of the statute as to contents and signature, as discussed respectively infra secs. 178-200, and infra secs. 201-215, is a sufficient memorandum or note. A memorandum may be written as well as with lead pencil as with pen and ink. It may also be filled in on a printed form (37 C.J.S., 653-654).

The note or memorandum required by the statute of fraud need not be contained in a single document, nor, when contained in two or more papers, need each paper to be sufficient as to contents and signature to satisfy the statute. Two or more writings properly connected may be considered together, matters missing or uncertain in one may be supplied or rendered certain by another, and their sufficiency will depend on whether, taken together, they meet the requirement of the statute as to contents and the requirements of the statute as to signature, as considered respectively infra secs. 179-200 and secs. 201-215.

Papers connected. — The rule is frequently applied to two or more, or a series of letters or telegrams, or letters and telegrams sufficiently connected to allow their consideration together; but the rule is not confined in its application to letters and telegrams; any other documents can be read together when one refers to the other. Thus, the rule has been applied so as to allow the consideration together, when properly connected, of a letter and an order of court, a letter and order for goods, a letter and a deposition, letters or telegrams and undelivered deeds, wills, corresponding and related papers, a check and a letter, a receipt and a check, deeds and a map, a memorandum of agreement and a deed, a memorandum of sale and an abstract of title, a memorandum of sale and a will, a memorandum of sale and a receipt, and a contract, deed and instruction to a depository in escrow. The number of papers connected to make out a memorandum is immaterial. (37 C.J.S. sec. 656-659).

Bearing in mind the foregoing rules, we are of the opinion that the applications marked exhibits "3" and "4", whether considered separately or jointly, satisfy all the requirements of the statute as to contents and signature and, as such, they constitute sufficient proof to evidence the agreement in question. And we say so because in both applications all the requirements of a contract are present, namely, the parties, the price or consideration, and the subject-matter. In the application exhibit "3", Ernest Berg appears as the seller and the Magdalena Estate Inc. as the purchaser, the former's interest in the Crystal Arcade as the subject-matter, and the sum of P200,000 as the consideration. As the application appears signed by Ernest Berg, the party sought to be charged by the obligation. In other words, it can clearly be implied that between Ernest Berg and the Magdalena Estate Inc. there has been a clear agreement to sell said property for P200,000. From the language of the application no other logical conclusion can be drawn for if there has not been any previous agreement between the parties it is fool hardly to suppose that Ernest Berg would take the trouble of filling an application with the Treasury Department of the United States to secure a license to sell the property. the claim of Ernest Berg that the negotiations he had with the Hemady ended with an offer on his part to buy his interest for P350,000 cannot be sustained, for if such is the case it is indeed hard to comprehend why he should state in his application that he was selling the property for P200,000. The fact that in the same application Berg also asked for license to place the money in an account in his name, or in the name of the company he represents, and to apply the same to the payment of the obligations of said company is of no consequence, nor does it argue against the purpose of the application, for that request only means that, should the sale be carried out, he would deposit the money in the name of the company and later would apply it to the payment of its obligations.

We do not agree with the claim that the application Exhibit "4" submitted by the Magdalena Estate Inc. does not harmonize with the terms appearing in the application Exhibit "3", for, contrary to the claim, those two applications, considered together, harmonize and complement each other. And we say so because the application Exhibit "4" states specifically that a portion of the sum of P400,000 which is desired to be raised as a loan will be used for the purchase of the one-third interest of Ernest Berg, which portion undoubtedly refers to the sum of P200,000 mentioned in the application Exhibit "3". This can be plainly seen by harmonizing together the two applications. As the rule well points out, the sufficiency of the two documents will depend on whether, taken together, they meet the requirements of the statute as to contents and as to signature, and here both requirements are

met because the two documents should be consider as a whole. Whether, therefore, we consider the two applications jointly or separately, it is safe to state that they meet the requirements of the principle underlying the statutes of frauds.

Let us now take the terms of the agreement to sell, considering that this has been properly established to see if defendant has complied with them and can ask now for specific performance. We have already seen that plaintiff agreed to sell to defendant his undivided one-third interest in the property for the sum of P200,000. The next question is: within what period shall this consideration be paid? Here are two possible theories: one under application Exhibit "3" and the other application Exhibit "4". If we follow the application Exhibit "3", it is clear that payment is to be made in cash, or as soon as the license has been granted to effect the transaction. This means that it shall be effected immediately upon obtaining the license, or within a reasonable time thereafter. It is not disputed that this license was granted, but we find that defendant failed to make good its offer within a reasonable time for lack of money, it being a fact that defendant was only able to raise funds for that purpose when it succeeded in selling a portion of its real estate to a foreign corporation one year thereafter, or on March 14, 1947. It is true that, in its answer, defendant claims that plaintiff granted to defendant an extension of time up to May 31, 1947, within which to realize the transaction, but this claim is not supported by any proof. In the opinion of the Court, this delay has the effect of relieving plaintiff of his obligation under the law (Articles 1124-1451, of the old Civil Code).

Supposing that the term of payment is, as contended by defendant, until defendant has obtained the loan of P400,000 from the National City Bank of New York, or after it has obtained funds from other sources (considering the terms of application Exhibit "4") what is the legal effect of this alternative clause? Can it be considered a term within the meaning of our old Civil Code? Let us analyze it. Under article 1125 of said code, obligations, for the fulfillment of which a day certain has been fixed, shall be demandable only when the day arrives. A day certain is understood to be that which must necessarily arrive, even though it is not known when. In order that an obligation may be with a term, it is, therefore, necessary that it should arrive, sooner or later; otherwise, if its arrival is uncertain, the obligation is conditional. To constitute a term the period must end on a day certain.

Viewing in this light the clause on which defendant relies for the enforcement of its right to buy the property, it would seem that it is not a term, but a condition. Considering the first alternative, that is, until defendant shall have obtained a loan from the National City Bank of New York, it is clear that the granting of such loans is not definite and cannot be held to come within the terms "day certain" provided for in the Civil code, for it may or it may not happen. As a matter of fact, the loan did not materialize. And if we consider that the period given was until such time as defendant could raise money from other sources, we also find it to be indefinite and contingent and so it is also a condition and not a term within the meaning of the law. In any event it is apparent that the fulfillment of the condition contained in this second alternative is made to depend upon the defendant's exclusive will, and viewed in this light, we are of the opinion that plaintiff's obligation to sell did not arise, for, under Article 1115 of the old Civil Code, "when the fulfillment of the condition depends upon the exclusive will of the debtor the conditional obligation shall be void."

Having reached the foregoing conclusions, we find no legal way by which plaintiff could be compelled to carry out the terms of his agreement to sell considering the circumstances surrounding the transaction. To our mind, it is clear that there was an agreement to sell between the parties under the terms appearing in the applications Exhibit "3" and "4". But it also appears that the plaintiff has decided to agree to sell his interest because of his need of money at the time. He needed it not only for his immediate needs but to pay the obligations of his own company, the Red Star Stores. Inc. At that time the values of real estate were fast moving. They were growing up in a rapid fashion. Time element was then of the essence of every transaction, and the parties knew it. When, therefore, more than a year had transpired since the negotiations started and defendant failed to come across, plaintiff changed his mind. The interest of defendant to purchase the share of plaintiff

in the property is understandable, not only because of the advisability to consolidate its ownership in said property, but because it was a handsome transaction with a brighter prospect in the future. But it is to be regretted that both Berg and Hemady who were both experienced businessmen did not put the terms of their agreement clearly in writing. Had they done so perhaps this case would have been avoided.

Finding no error in the decision appealed from, the same is hereby affirmed, with costs against appellant.

Pablo, Padilla and Montemayor, JJ., concur.

Separate Opinions

BENGZON, J., concurring:

I concur in the result. I believe no agreement has been duly proved.

LABRADOR, J., concurring:

I concur. There might be some objection to considering Exhibit 3 (application of Ernest Berg with the United States Treasury Department to sell his interest in the Crystal Arcade Building for P200,000 cash) and Exhibit 4 (application of the Magdalena Estate, Inc., with the United States Treasury Department for a portion of the P200,000 requested as loan from the National City Bank of New York to purchase one-third of the Crystal Arcade Building belonging to Ernest Berg) as notes or memoranda of the contract entered into between the parties for the sale of the property, within the meaning of the statute of frauds. In some jurisdictions it is held that in order to comply with the requirements of the statute of frauds a letter must be sent to the contracting party or his agent(27 C.J.S., sec. 386, p. 302). Such a rule is the one adopted in the State of New Jersey. But in the Code of Civil Procedure of the State of California (sections 1973-1974), from which our original statute of frauds was taken (section 335 of Act No. 190), the rule is that a letter or telegram of the party sought to be charged to a third person may be considered as a sufficient memorandum within the meaning of the statute. Ibid.; Moss vs. Atkinson, 44 Cal. 3). This doctrine is also followed in Kansas, Missouri, New York, Iowa, North Carolina, New England, and Ontario. (See footnotes to 27 C.J.S. 302.) In a case decided in Kansas it was expressly held:

Nor is it necessary, in the case of a memorandum in the form of a letter, that it should be addressed to the vendee. Letters to a third person are sufficient memoranda. Browne, St. Frauds (5th Ed.) Sec. 354a. "The principle upon which these decisions are based we understand to be that the statute was not intended to apply to written contracts, out to the information of oral contracts when properly evidenced, as by the admission in writing of the party to be charged. If the party sought to be charged has in writing admitted the contract, this is sufficient, as we understand, to take the case out of the statute, no matter to whom the writing may have been addressed. Warfield v. Cranberry Co., 33 Iowa, 312, 19 N.W. 224. (Miller v. Kansas City, Ft. S. & M. R. Co., et al., 58 Kan. 189, 48 P. 853, 854).

As section 21 of Rule 123, Rules of Court, our statute of frauds when the communications to the United States Treasury Department were sent by the parties to this case, is a rule of evidence (as to the character of the new provision [article 1403] of the New Civil Code, quaere), and the written memorandum is not the contract itself, but merely evidence thereof, it is not necessary for the admission as evidence of any note or memorandum signed by a party thereto, that it be signed by, or addressed to, the other also.

Defendant-appellant's counterclaim to compel plaintiff-appellee to sell the property must, however, be denied, for the reason that the conditions under which the contract to sell were to be carried out did not materialize within a reasonable time after it was entered into, and both parties, upon failure of the contingencies relied upon, impliedly withdrew therefrom. The agreement was that the sale shall be carried out when the vendor will get the necessary permit to sell from the United States Treasury Department, and the Magdalena Estate, Inc., will get the loan from the National City Bank of New York with which to pay the price. These conditions are suspensive. The sale was to be carried out only if these should materialize.

En el segundo parrafo del articulo 1.113 y en el 1.114 inicia el Codigo la clasificacion mas importante de las condiciones en suspensivas y resolutorias, desenvolviendola luego en los articulos 1.122 y siguientes, al determinar los efectos, consecuencia del complimiento de unas y otras. Su diferencia es bien clara; unas y otras influyen en la existencia de la obligacion, pero por modos diametralmente opuestos: si la condicion suspensiva se cumple, la obligacion surge; si se cumple la resolutoria, la obligacion se extingue; si la una no se realiza, el vinculo de derecho no llega a aparecer; si la otra no se verifica, la relacion de derecho se consolida; mientras dura la duda, la obligacion, en el primer caso, no aparece, pero su existencia es una esperanza; y en el segundo, surte sus efectos, pero pesa sobre ella una amenaza de caducidad. (8 Manresa, 122

That there were suspensive conditions may be inferred from their conduct. The defendant-appellant's manager did not demand that the sale be carried out until after the filing of the complaint in the month of April, 1947, or fully one year after the contract to sell had been agreed upon. Berg, the vendor, also raised the funds he needed for his business by selling a property of his in Quezon City to the vendee itself. (Deposition of Ernest Berg, Exhibit A, p. 4.) During all the time that they were in continuous correspondence regarding the administration of the property, never was a word said about carrying out the sale. All these show that they actually desisted from carrying out the terms of the contract to sell.

Paras, C.J. and Jugo, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-23351 March 13, 1968

CIRILO PAREDES, plaintiff-appellant, vs. JOSE L. ESPINO, defendant-appellee.

Simeon Capule for plaintiff-appellant. Iñigo R. Peña for defendant-appellee.

REYES, J.B.L., Actg. C.J.:

Appeal from an order of the Court of First Instance of Palawan in its Civil Case No. 453, granting a motion to dismiss the complaint.

Appellant Cirilo Parades had filed an action to compel defendant-appellee Jose L. Espino to execute a deed of sale and to pay damages. The complaint alleged that the defendant "had entered into the sale" to plaintiff of Lot No. 67 of the Puerto Princesa Cadastre at P4.00 a square meter; that the deal had been "closed by letter and telegram" but the actual execution of the deed of sale and payment of the price were deferred to the arrival of defendant at Puerto Princesa; that defendant upon arrival had refused to execute the deed of sale altho plaintiff was able and willing to pay the price, and continued to refuse despite written demands of plaintiff; that as a result, plaintiff had lost expected profits from a resale of the property, and caused plaintiff mental anguish and suffering, for which reason the complaint prayed for specific performance and damages.

Defendant filed a motion to dismiss upon the ground that the complaint stated no cause of action, and that the plaintiff's claim upon which the action was founded was unenforceable under the Statute of Frauds.

Plaintiff opposed in writing the motion to dismiss and annexed to his opposition a copy of a letter purportedly signed by defendant (Annex "A"), wherein it was stated (Record on Appeal, pp. 19-20) —

106 GonzagaSt. Tuguegarao,Cagayan May18,1964 Mr.CiriloParedes Pto.Princesa,Palawan

Dear Mr. Paredes:

So far I received two letters from you, one dated April 17 and the other April 29, both 1964. In reply thereto, please be informed that after consulting with my wife, we both decided to accept your last offer of Four (P4.00) pesos per square meter of the lot which contains 1826 square meters and on cash basis.

In order that we can facilitate the transaction of the sale in question, we (Mrs. Espino and I), are going there (Puerto Princess, Pal.) to be there during the last week of the month, May. I will send you a telegram, as per your request, when I will reach Manila before taking the boat for Pto. Princess. As it is now, there is no schedule yet of the boats plying between Manila and Pto. Princess for next week.

Plaintiff also appended as Annex "A-1", a telegram apparently from defendant advising plaintiff of his arrival by boat about the last week of May 1964 (Annex "A-1" Record on Appeal, p. 21), as well as a previous letter of defendant (Appendix B, Record on Appeal, p. 35) referring to the lot as the one covered by Certificate of Title No. 62.

These allegations and documents notwithstanding, the Court below dismissed the complaint on the ground that there being no written contract, under Article 1403 of the Civil Code of the Philippines —

Although the contract is valid in itself, the same can not be enforced by virtue of the Statute of Frauds. (Record on Appeal, p. 37).1äw phï1.ñët

Plaintiff duly appealed to this Court.

The sole issue here is whether enforcement of the contract pleaded in the complaint is barred by the Statute of Frauds; and the Court a quo plainly erred in holding that it was unenforceable.

The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be in writing. The plain text of Article 1403, paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent, suffices to make the verbal agreement enforceable, taking it out of the operation of the statute.

Art. 1403. — The following contracts are unenforceable, unless they are ratified:

(1) . . .

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

x x x x x x x x x

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein.1äwphï1.ñët

x x x x x x x x x

In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and telegram" (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was appended as Exhibit A to plaintiff's opposition to the motion dismiss. This letter, transcribed above in part, together with that one marked as Appendix B, constitute an adequate memorandum of the transaction. They are signed by the defendant-appellee; refer to the property sold as a lot in Puerto Princesa, Palawan, covered, by TCT No. 62; give its area as 1826 square meters and the purchase price of four (P4.00) pesos per square meter payable in cash. We have in them therefore, all the essential terms of the contract, and they satisfy the requirements of the Statute of Frauds. We have ruled in Berg vs. Magdalena Estate, Inc., 92 Phil. 110, 115, that a sufficient memorandum may be contained in two or more documents.

Defendant-appellee argues that the authenticity of the letters has not been established. That is not necessary for the purpose of showing prima facie that the contract is enforceable. For as ruled by us in Shaffer vs. Palma, L-24115, March 1, 1968, whether the agreement is in writing or not, is a question of evidence; and the authenticity of the writing need not be established until the trial is held. The plaintiff having alleged that the contract is backed by letter and telegram, and the same being a

sufficient memorandum, his cause of action is thereby established, especially since the defendant has not denied the letters in question. At any rate, if the Court below entertained any doubts about the existence of the written memorandum, it should have called for a preliminary hearing on that point, and not dismissed the complaint.

WHEREFORE, the appealed order is hereby set aside, and the case remanded to the Court of origin for trial and decision. Costs against defendant-appellee Jose L. Espino. So ordered.

Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 141877 August 13, 2004

GREGORIO F. AVERIA and SYLVANNA A. VERGARA, representing the absentee heir TERESA AVERIA,petitioners, vs. DOMINGO AVERIA, ANGEL AVERIA, FELIPE AVERIA, and the Heirs of FELIMON F. AVERIA, respondents.

D E C I S I O N

CARPIO-MORALES, J.:

Macaria Francisco (Macaria) and Marcos Averia contracted marriage which bore six issues, namely: Gregorio, Teresa, Domingo, Angel, Felipe and Felimon.

Macaria was widowed and she contracted a second marriage with Roberto Romero (Romero) which bore no issue.

Romero died on February 28, 1968,1 leaving three adjoining residential lots located at Sampaloc, Manila.

In a Deed of Extrajudicial Partition and Summary Settlement of the Estate of Romero, the house and lot containing 150 square meters at 725 Extremadura Street, Sampaloc was apportioned to Macaria.

Transfer Certificate of Title (TCT) No. 93310 covering the Extremadura property was accordingly issued in the name of Macaria.2

Alleging that fraud was employed by her co-heirs in the partition of the estate of Romero, Macaria filed on June 1, 1970 an action for annulment of title and damages before the Court of First Instance of Manila against her co-heirs Domingo Viray, et al., docketed as Civil Case No. 79955. Macaria was represented in the case by Atty. Mario C. R. Domingo. The case was pending litigation for about ten years until the decision of the Court of Appeals which adjudged Macaria as entitled to an additional 30 square meters of the estate of Romero became final and executory.

Macaria’s son Gregorio and his family and daughter Teresa’s family lived with her at Extremadura until her death on March 28, 1983.3

Close to six years after Macaria’s demise or on January 19, 1989, her children Domingo, Angel and Felipe, along with Susan Pelayo vda. de Averia (widow of Macaria’s deceased son Felimon), filed before the Regional Trial Court (RTC) of Manila a complaint against their brother Gregorio and niece Sylvanna Vergara "representing her absentee mother" Teresa Averia, for judicial partition of the Extremadura property inclusive of the 30 square meters judicially awarded.4 The case which was docketed as Civil Case No. 89-47554 is now the subject of the present decision.

The defendants Gregorio and Sylvanna Vergara, in their February 8, 1989 Answer to the Complaint, countered that Gregorio and his late wife Agripina spent for the litigation expenses in Civil Case No. 79955, upon the request of Macaria, and the couple spent not less P20,000.00 for the purpose "which amount due to the inflation of the Philippine peso is now equivalent to more or less P200,000.00;" that from 1974 to 1983, Macaria was bedridden and it was Gregorio’s wife Agripina who nursed and took care of her; that before Macaria died, she in consideration of the court and other expenses which were defrayed by Gregorio and his wife in prosecuting Civil Case No. 79955 and of "the kindness of the said couple in caring for her," verbally sold to the spouses Gregorio and Agripina one-half (½) of her Extremadura property.

Gregorio and Sylvanna further countered that the plaintiff Domingo sold and assigned to the spouses Gregorio and Agripina his one sixth (1/6) share in the remaining ½ portion of the Extremadura property.

Gregorio and Sylvanna concluded in their Answer that the plaintiffs are not co-owners of the Extremadura property as ½ thereof is solely owned by Gregorio and 1/6 of the other half representing Domingo’s share thereof had already been sold and assigned by him (Domingo) to Gregorio and his wife who died on May 20, 1987.5

During the pendency of the case or on June 7, 1989, Macaria’s son Felipe executed a Waiver-Affidavit6 waiving his "share" in the property subject of litigation in favor of his co-heirs.

After trial, the trial court, Branch 31 RTC of Manila, rendered a decision of July 19, 19917 crediting the version of the defendants in this wise, quoted verbatim:

The defendant Gregorio Averia, Sr. had established that he had paid plaintiff Domingo Averia P10,000.00 although denied by the latter but Domingo Averia did not deny receiving the amount of P5,000.00 on July 10, 1983 given by Gregorio Averia’s wife Agrifina. According to the testimony of defendant’s witness, plaintiff Domingo Averia sold on July 10, 1983 his inheritance share in the property [consisting of a] house and lot located at 725 Extremadura because he was in . . . need of money and that he was paid P5,000.00 on July 10, 1983 by Agrifina Averia and another P5,000.00 by Major Gregorio Averia inside his room at the Makati Police Department three (3) days later. The reason why Domingo Averia became insistent in claiming his inheritance is the fact that Gregorio Averia refused the request of Domingo Averia and his children to occupy the portion of subject house which was sold to

him by their mother and it was for this reason that they sought the assistance of the Citizens Legal Assistance Office (CLAO), Atty. Benjamin Roxas in writing defendant Gregorio Averia to allow him (Domingo Averia) to occupy a portion of subject house but plaintiff Domingo Averia did not tell his brothers and sisters that he had already sold his 1/6 share of the inheritance although verbally in favor of Gregorio Averia and his wife.

In the light of the foregoing, the Court, after a circumspect assessment of the evidence presented by both parties, hereby declares, that defendant Gregorio Averia then a major of police precinct in Makati was the person responsible for the expenses in litigation in Civil Case No. 79955, involving the property and their mother had indeed awarded him with ½ portion of the property and that Domingo Averia sold 1/6 of [his] share of the remaining ½ portion of the property to defendant Gregorio. (Underscoring supplied)

Accordingly, the trial court disposed as follows, quoted verbatim:

WHEREFORE, the remaining 5/6 of ½ of the property may still be subject of partition among the remaining heirs but the summary settlement of the remaining estate of the 5/6 remaining portion of the estate . . . may be sold and the proceeds thereof be distributed among the heirs in accordance with the aliquot portions of each and every heir of the deceased Macaria Francisco.

Both parties are hereby ordered to shoulder their respective expenses for attorney’s fees and litigation costs. (Underscoring supplied)

On appeal to the Court of Appeals (CA) wherein the plaintiffs Domingo et al. assigned two errors, to wit:

A. THE TRIAL COURT ERRED IN ITS FINDING THAT THERE WAS A SALE OF ONE-HALF OF THE DECEASED MACARIA F. AVERIA’S INTEREST AND OWNERSHIP OVER THE SUBJECT PROPERTY IN FAVOR OF DEFENDANT-APPELLEE GREGORIO AVERIA.

B. THE TRIAL COURT ERRED IN ALLOWING THE RECEPTION OF PAROL EVIDENCE TO THE EFFECT THAT PLAINTIFF-APPELLANT DOMINGO AVERIA HAD ALREADY DISPOSED OF HIS ONE SIXTH (1/6) SHARE OF THE SUBJECT PROPERTY IN FAVOR OF DEFENDANT-APPELLEE GREGORIO AVERIA8(Emphasis supplied),

the appellate court reversed the decision of the trial court.

In reversing the trial court, the appellate court, noting that the alleged transfers made by Macaria and Domingo in favor of Gregorio were bereft of any written memoranda, held that it was error for the trial court to rely solely on the evidence adduced by the defendants consisting of the testimonies of Gregorio, Veronica Bautista, Sylvanna Vergara Clutario, Atty. Mario C.R. Domingo, Felimon Dagondon and Gregorio Averia, Jr. The CA explained its ruling in this wise:

[T]he alleged conveyances purportedly made by Macaria Francisco and plaintiff-appellant Domingo Averia are unenforceable as the requirements under the Statute of Frauds have not been complied with. Article 1403, 2(e) of the New Civil Code is explicit:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement thereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party charged, or by this agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) x x x;

(b) x x x;

(e) an agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

(f) x x x"

The two (2) transactions in question being agreements for the sale of real property or of an interest therein are in clear contravention of the prescription that it must be in writing and subscribed by the party charged or by an agent thereof. Hence, the strong insistence by defendants-appellees on the verbal conveyances cannot be made the basis for the alleged ownership over the undivided interests claimed by Gregorio Averia.

The parol evidence upon which the trial court anchored its award in favor of defendant-appellee Gregorio Averia is irregular as such kind of evidence is foreclosed by Article 1403 of the Civil Code that no evidence of the alleged agreements can be received without the writing of secondary evidence which embodies the sale of the real property. The introduction of the testimonies of Gregorio Averia’s witnesses were timely objected to by plaintiffs-appellants. Since the testimonies of defendants-appellees’ witnesses are inadmissible, then such exclusion has pulled the rug under the assailed decision of the trial court and it has no more leg to stand on.

In the vain attempt to salvage the situation, defendants-appellees however argue that the Article 1403 or the Statute of Frauds does not apply because the same only refers to purely executory contracts and not to partially or completely executed contracts.

This contention is untenable. It was not amply demonstrated how such alleged transfers were executed since plaintiffs-appellants have vigorously objected and opposed the claims of ownership by defendants-appellees. He who asserts a fact or the affirmative of an issue has the burden of proving it. Defendants-appellees miserably failed in this respect.

While this Court cannot discount the fact that either defendant-appellee Gregorio Averia or plaintiff-appellant Domingo Averia may have valid claims against the estate of Macaria Francsico, such matter can best be threshed out in the proceedings for partition before the court a quo bearing in mind that such partition is subject to the payment of the debts of the deceased under Article 1078 of the Civil Code.9(Citations omitted; Emphasis and underscoring supplied)

The appellate court thus remanded the case to the trial court.

WHEREFORE, the decision dated July 19, 1991 is reversed and set aside. The case is remanded to the court a quo which is directed to effect the partition of the subject property or if not, possible, sell the entire lot and distribute the proceeds of the sale based on equal

shares among the children of the late Macaria Francisco after debts of the said deceased are paid or settled pursuant to Article 1078 of the Civil Code.10(Underscoring supplied)

Gregorio and Sylvanna’s motion for reconsideration having been denied by the appellate court, they lodged the Petition for Review on Certiorari at bar upon the following assignment of errors:

I. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THERE WAS NO SALEOF ONE-HALF (1/2) OF THE DECEASED MACARIA F. AVERIA’S INTEREST AND OWNERSHIP OVER THE SUBJECT PROPERTY IN FAVOR OF PETITIONER GREGORIO F. AVERIA.

II. THE COURT OF APPEALS (SECOND DIVISION) ERRED IN ITS FINDING THAT THE RECEPTION OF PAROL EVIDENCE TO THE EFFECT THAT RESPONDENT DOMINGO AVERIA HAD ALREADY SOLD HIS ONE SIXTH (1/6) SHARE IN THE SUBJECT PROPERTY IN FAVOR OF PETITIONER GREGORIO AVERIAIS NOT IN ACCORDANCE WITH LAW.11

Petitioners contend that contrary to the findings of the Court of Appeals, they were able to amply establish, by the testimonies of credible witnesses, the conveyances to Gregorio of ½ of the Sampaloc property and 1/6 of the remaining half representing the share of Domingo.12

With respect to the application by the appellate court of the Statute of Frauds, petitioners contend that the same refers only to purely executory contracts and not to partially or completely executed contracts as in the instant case. The finding of the CA that the testimonies of petitioners’ witnesses were timely objected to by respondents is not, petitioners insist, borne out in the records of the case except with respect to the testimony of Gregorio.13

Petitioners thus conclude that respondents waived any objection to the admission of parol evidence, hence, it is admissible and enforceable14 following Article 140515 of the Civil Code.16

The Court finds for petitioner.

Indeed, except for the testimony of petitioner Gregorio bearing on the verbal sale to him by Macaria of the property, the testimonies of petitioners’ witnesses Sylvanna Vergara Clutario and Flora Lazaro Rivera bearing on the same matter were not objected to by respondents. Just as the testimonies of Gregorio, Jr. and Veronica Bautista bearing on the receipt by respondent Domingo on July 23, 1983 from Gregorio’s wife of P5,000.00 representing partial payment of the P10,000.00 valuation of his (Domingo’s) 1/6 share in the property, and of thetestimony of Felimon Dagondon bearing on the receipt by Domingo of P5,000.00 from Gregorio were not objected to. Following Article 1405 of the Civil Code,17 the contracts which infringed the Statute of Frauds were ratified by the failure to object to the presentation of parol evidence, hence, enforceable.

ARTICLE 1403. The following contracts are unenforceable, unless they are ratified:

x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

x x x

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

x x x (Emphasis and underscoring supplied),

Contrary then to the finding of the CA, the admission of parol evidence upon which the trial court anchored its decision in favor of respondents is not irregular and is not foreclosed by Article 1405.

In any event, the Statute of Frauds applies only to executory contracts and not to contracts which are either partially or totally performed.18 In the case at bar, petitioners claimed that there was total performance of the contracts, full payment of the objects thereof having already been made and the vendee Gregorio having, even after Macaria’s death in 1983, continued to occupy the property until and after the filing on January 19, 1989 of the complaint subject of the case at bar as in fact he is still occupying it.

In proving the fact of partial or total performance, oral evidence may be received as what the trial court in the case at bar did. Noted civilist Arturo M. Tolentino elucidates on the matter:

The statute of frauds is not applicable to contracts which are either totally or partially performed, on the theory that there is a wide field for the commission of frauds in executory contracts which can only be prevented by requiring them to be in writing, a fact which is reduced to a minimum in executed contracts because the intention of the parties becomes apparent by their execution, and execution concludes, in most cases, the rights of the parties. However it is not enough for a party to allege partial performancein order to render the Statute of Frauds inapplicable; such partial performance must be duly proved. But neither is such party required to establish such partial performance by documentary proof before he could have the opportunity to introduce oral testimony on the transaction. The partial performance may be proved by either documentary or oral evidence.19 (Emphasis, underscoring and italics supplied)

The testimonies of petitioners’ witnesses being credible and straightforward, the trial court did not err in giving them credence.

The testimony of Sylvana Vergara Clutario, daughter of Teresa, in fact was more than sufficient to prove the conveyance of half of the subject property by Macaria to Gregorio.

ATTY. DOMINGO:

Q: Are you the same Sylvana Vergara representing the defendant Teresa Averia in this case?

WITNESS:

A: Yes, sir.

Q: Now on February 28, 1972, about 5:30 in the afternoon, where were you?

A: As far as I can remember, I was inside my residence at 725 Extremadura at that date, and time.

Q: On that date and time, where were you residing?

A: At said address, 725 Extremadura Street, that time and date at 5:30 in the afternoon.

Q: Who were your companions if you have any?

A: I was there with my brothers and sisters and Uncle Gregorio and Auntie Agripina and the children and my grand mother and also the lady who is leading in the prayers because on that date it is the anniversary of the death of my grandfather.

Q: What is the name of your grandmother?

A: Macaria Averia, sir.

Q: Now, this Gregorio Averia whom you identified to be your Uncle, is he the same Gregorio Averia who is also the defendant in this case?

WITNESS:

A: The same, sir.

Q: What is the name of your grandfather whom you said whose death anniversary you are then celebrating on that date?

A: Roberto Romero, sir.

Q: What actually you were doing that time 5:30?

A: We had a gathering and merienda in recollection of the celebration (sic) of the death of my grandfather, sir.

Q: When you said you were eating then, where were you eating then?

A: It was beside my grandmother.

Q: Where?

A: At the dining room, sir.

Q: So you were sitting at the dining table all of you?

A: Yes, sir the others were a little bit near the table.

Q: Who were seated in the dining table?

A: The Spouses Gregorio and Agripina, my sister Beth and my cousins and my Lola Macaria.

Q: When you were then seated in taking that ginatan as you stated what transpired?

A: Somebody called up and the one who called up was the Secretary of a lawyer and they were asking for [payment of] expenses in connection with . . . [Criminal Case No. 79955].

Q: You said that it was Agripina who was the one who answered that telephone call. After answering it, what did she say to anyone seated in that table?

A: Agripina said if Gregorio has some money, he will pay them but Gregorio said he will be responsible for the expenses.

Q: Did you come to know how much was amount being asked?

A: P500.00, sir.

Q: What else happened after Gregorio said that he would answer for the expenses to be sent to the lawyer?

A: My Lola said that she was embarrassed and ashame[d] because at that time she d[id] not have any money and it was the couple who was taking the expenses of the case.

Q: When you said "Lola," you are referring to Macaria Averia?

A: Yes, sir.

Q: What else transpired?

A: Because of her embarrassment, she told [them that] one half (1/2) of the House and Lot will be given to the couple to cover the expenses of the case.

ATTY. DOMINGO:

Q: To whom did your grandmother say this?

A: Well, she said that to Gregorio and Agripina and Gregorio told her, if that is what you wish, I will agree to your proposal.

Q: What was the reply of your grand mother?

A: My Lola told Gregorio that since you agree, you better prepare all the documents and we will make ready the documents for the division or partition.

Q: Do you know what House and Lot one half (1/2) of which your grand mother was given (sic) to your Uncle and Auntie . . .?

A: She is referring to the House and Lot where I used to live before.

Q: You are referring to the House and Lot located at 725 Extremadura Street, Sampaloc, Manila.

A: Yes, sir.

x x x20 (Emphasis and underscoring supplied)

Not only on account of Sylvana’s manner of testifying that her testimony should be given weight. Her testimony was against the interest of her mother Teresa whom she represented, her mother being also an heir of Macaria. If the transfer by Macaria to Gregorio of ½ of the property is upheld as valid and enforceable, then the share of the other heirs including Sylvanna’s mother would considerably be reduced.

That Atty. Mario C. R. Domingo who was admittedly Macaria’s counsel in Civil Case No. 79955 (which, as priorly reflected, entailed a period of ten years in court), affirmed on the witness stand that Gregorio and his wife were the ones who paid for his attorney’s fees amounting to P16,000.0021 should no doubt strongly lend credence to Gregorio’s claim to that effect.

As to the sale of Domingo’s 1/6 share to Gregorio, petitioners were able to establish said transaction by parol evidence, consisting of the testimonies of Gregorio Averia, Jr.,22 Veronica Averia23 and Felimon Dagondon24 the presentation of which was, it bears repeating, not objected to.

Albeit Domingo never denied having received the total amount of P10,000.00 from Gregorio and his wife, he denied having sold to Gregorio his interest over the property. Such disclaimer cannot, however, prevail over the categorical, positive statements of petitioners’ above-named witnesses.

In sum, not only did petitioners’ witnesses prove, by their testimonies, the forging of the contracts of sale or assignment. They proved the full performance or execution of the contracts as well.

WHEREFORE, the petition is hereby GRANTED. The January 31, 2000 Decision of the Court of Appeals in CA-G.R. No. 44704 is hereby SET ASIDE.

The case is hereby remanded to the trial court, Branch 31 of the RTC of Manila, for appropriate action, following Section 2 of Rule 69 of the Rules of Civil Procedure.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-51058 January 27, 1992

ASIA PRODUCTION CO., INC., WANG TA PENG and WINSTON WANG, petitioners, vs. HON. ERNANI CRUZ PAñO, as Judge of the Court of First Instance of Rizal (Quezon City, Branch XVIII), LOLITA LEE LE HUA and ALBERTO DY, respondents.

Ismael J. Andres for petitioner Asia Production Co., Inc.

Burgos, Sarte, Rebueno & Sarte for petitioners.

Roman Careaga for Alberto Dy.

DAVIDE, JR. J.:

The simple issue in this case is whether or not an action for the refund of partial payments of the purchase price of a building covered by an oral agreement to sell it with an oral promise to assign the contract of lease on the lot where the building is constructed is barred by the Statute of Frauds.

Sometime in March 1976, private respondents, who claimed to be the owners of a building constructed on a lot leased from Lucio San Andres and located in Valenzuela, Bulacan, offered to sell the building to the petitioners for P170,000.00. Petitioners agreed because of private respondents' assurance that they will also assign to the petitioners the contract of lease over the land. The above agreement and promise were not reduced to writing. Private respondents undertook to deliver to the petitioners the deed of conveyance over the building and the deed of assignment of the contract of lease within sixty (60) days from the date of payment of the downpayment of P20,000.00. The balance was to be paid in monthly installments. On 20 March 1976, petitioners paid the downpayment and issued eight (8) postdated checks drawn against the Equitable Banking Corporation for the payment of the eight (8) monthly installments, as follows:

Check No. Amount Due Date

10112253 P10,000.00 June 30, 1976 10112254 20,000.00 July 30, 1976 10112255 20,000.00 August 30, 1976 10112256 20,000.00 September 30, 1976 10112257 20,000.00 October 30, 1976 10112258 20,000.00 November 30, 1976 10112259 20,000.00 December 30, 1976 10112260 20,000.00 January 31, 1977

Relying on the good faith of private respondents, petitioners constructed in May 1976 a weaving factory on the leased lot. Unfortunately, private respondents, despite extensions granted, failed to comply with their undertaking to execute the deed to sale and to assign the contract despite the fact that they were able to encash the checks dated 30 June and 30 July 1976 in the total amount of P30,000.00. Worse, the lot owner made it plain to petitioners that he was unwilling to give consent to the assignment of the lease unless petitioners agreed to certain onerous terms, such as an increase in rental, or the purchase of the land at a very unconscionable price.

Petitioners were thus compelled to request for a stop payment order of the six (6) remaining checks. Succeeding negotiations to save the transaction proved futile by reason of the continued failure of private respondents to execute the deed of sale of the building and the deed of assignment of the contract of lease.

So, on or about 29 December 1976, upon prior agreement with private respondents, petitioners removed all their property, machinery and equipment from the building, vacated the same and returned its possession to private respondents. Petitioners demanded from the latter the return of their partial payment for the purchase price of the building in the total sum of P50,000.00. Private respondents refused to return it. Hence, petitioners, filed against private respondents a complaint 1 for its recovery and for actual, moral and exemplary damages and attorney's fees with the

then Court of First Instance (now Regional Trial Court) of Quezon City, which was docketed as Civil Case

No. Q-23593. The case was raffled to Branch XVIII of the court which was then presided over by herein respondent Judge.

Private respondent Lolita Lee Le Hua did not file an Answer; hence, she was declared in default.

Upon the other hand, private respondent Alberto Dy filed a motion to dismiss the complaint on the ground that the claim on which the action is based — an alleged purchase of a building which is not evidenced by any writing — cannot be proved by parol evidence since Article 1356 in relation to Article 1358 of the Civil Code requires that it should be in writing. 2 In

their opposition 3 to said motion, petitioners argue that their complaint is essentially for collection of a sum of money; it does not seek to enforce the sale, but aims to compel private respondents to refund a sum of money which was paid to them as purchase price in a sale which did not materialize by reason of their bad faith. Furthermore, the execution of the document was an undertaking of the private respondents, which they refused to comply with. Hence, they cannot now be heard to complain against something which they themselves brought about.

In his Order 4 of 18 April 1979, respondent Judge granted the motion to dismiss on the ground that the complaint is barred by the Statute of Frauds. He says:

It cannot be disputed that the contract in this case is condemned by the Statutes of Fraud (sic) it involves not merely the sale of real property (the building), it also includes an alleged lease agreement that must certainly be for more than one year (See Art. 1403, No. 2, subparagraph e, New Civil Code).

Plaintiffs cannot avoid the Statutes of Fraud (sic) by saying that this is merely an action for the collection of a sum of money. To be entitled to the sum of P50,000.00, it is necessary to show that such contract was executed and the same was violated but — plaintiffs are prevented from proving this alleged agreement by parol evidence.

Neither may plaintiffs claim that by the payment of the sum of P50,000.00 the contract was removed from the Statutes of Fraud (sic). This is so because plaintiffs have not fully complied with their obligation to pay P170,000.00. If there had been full payment of P170,000.00, the situation would have been different.

Plaintiffs knew or should have known that their contract (as described by them in their complaint) was unenforceable; they had thereby voluntarily assumed the risks attendant to such contract. Moreover, the primordial aim of the Statutes of Fraud (sic) is to prevent fraud and perjury in the enforcement of obligations depending upon the unassisted memory of witnesses (Shoemaker vs. La Tondeña, 68 Phil. 24). The Court would find it difficult to determine whether the sum of P50,000.00 was paid because of the unenforceable contract or for some other transactions.

Their motion for reconsideration 5 having been denied by respondent Judge in his Order 6 of 21 June

1979 for the reason that the oral contract in this case was not removed from the operation of the Statute of Frauds because there was no full or complete performance by the petitioners of the contract as required in Paterno vs. Jao Yan 7 and Babao vs. Perez, 8petitioners filed this petition

9 on 16 July 1979, alleging therein as ground therefor grave abuse of discretion on the part of respondent Judge in issuing the orders of 18 April 1979 and 21 June 1979.

After private respondent Alberto Dy filed his Comment 10 to the petition in compliance with the

resolution 11 of 23 July 1979 and petitioners filed their Reply 12 to said comment on 2 April 1980, this Court

gave due course 13 to the petition. Private respondent Lolita Lee Le Hua was considered to have waived her right to file her comment to the petition. 14

Petitioners were subsequently required to file their Brief, which they complied with on 13 October 1981; 15 they make the following assignment of errors:

I

The lower court erred in holding that for a contract of purchase and sale to be removed from the operation of the Statute of Frauds, there must be full and complete payment of the purchase price.

II

The lower court erred in failing to appreciate the nature of petitioners' cause of action.

III

The lower court erred in not finding that this case is not covered by the Statute of Frauds.

IV

The lower court erred in not following the procedure prescribed by this Honorable Court in cases when partial performance is alleged.

V

The lower court erred in dismissing the case.

Private respondents did not file their Brief.

We find merit in the petition. Respondent Judge committed grave abuse of discretion in dismissing the complaint on the ground that the claim is barred by the Statute of Frauds.

Article 1403 of the Civil Code declares the following contracts, among others, as unenforceable, unless they are ratified:

xxx xxx xxx

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

(f) A representation to the credit of a third person.

xxx xxx xxx

The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. 16 It was not designed to further or perpetuate fraud. Accordingly, its application is limited. It

makes only ineffective actions for specific performance of the contracts covered by it; it does not declare them absolutely void and of no effect. As explicitly provided for in the above-quoted paragraph (2), Article 1403 of the Civil Code, the contracts concerned are simply "unenforceable" and the requirement that they — or some note or memorandum thereof — be in writing refers only to the manner they are to be proved. It goes without saying then, as held in the early case of Almirol, et al. vs. Monserrat, 17 that the statute will apply only to executory rather than executed contracts. Partial execution is even enough to bar the application of the statute. In Carbonnel vs. Poncio, et al., 18 this Court held:

. . . It is well-settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil. 512), not to contracts that are totally or partially performed (Almirol, et al. vs. Monserrat, 48 Phil. 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil. 387; Diana vs. Macalibo, 74 Phil. 70).

Subject to a rule to the contrary followed in a few jurisdictions, it is the accepted view that part performance of a parol contract for the sale of real estate has the effect, subject to certain conditions concerning the nature and extent of the acts constituting performance and the right to equitable relief generally, of taking such contract from the operation of the statute of frauds, so that chancery may decree its specific performance or grant other equitable relief. It is well settled in Great Britain and in this country, with the exception of a few states, that a sufficient part performance by the purchaser under a parol contract for the sale of real estate removes the contract form the operation of the statute of frauds (49 Am. Jur. 722-723).

In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud." (Comments on the Rules of Court, by Moran, Vol. III [1957 ed.] p. 178). However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by him form the transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby.

It follows then that the statute applies only to executory contracts and in actions for their specific performance. It does not apply to actions which are neither for violation of a contract nor for the performance thereof. 19

There can be no dispute that the instant case is not for specific performance of the agreement to sell the building and to assign the leasehold right. Petitioners merely seek to recover their partial payment for the agreed purchase price of the building, which was to be paid on installments, with the private respondents promising to execute the corresponding deed of conveyance, together with the assignment of the leasehold rights, within two (2) months from the payment of the agreed downpayment of P20,000.00. By their motion to dismiss, private respondents theoretically or hypothetically admitted the truth of the allegations of fact in the complaint. 20 Among the allegations

therein are: (1) that the P50,000.00 sought to be recovered represents the downpayment of P20,000.00 and two (2) monthly installments of the purchase price, and (2) that petitioners decided, in effect, to withdraw from the agreement by ordering the stop payment of the remaining six (6) checks and to return the possession of the building to private respondents because of the latter's failure to comply with their agreement. The action is definitely not one for specific performance, hence the Statute of Frauds does not apply. And even if it were for specific performance, partial execution thereof by petitioners effectively bars the private respondents from invoking it. Since it is for refund of what petitioners had paid under the agreement, originally unenforceable under the statute, because petitioners had withdrawn therefrom due to the "bad faith" of the private respondents, the latter cannot be allowed to take shelter under the statute and keep the P50,000.00 for themselves. If this were the case, the statute would only become a shield for fraud, allowing private respondents not only to escape performance of their obligations, but also to keep what they had received from petitioners, thereby unjustly enriching themselves.

Besides, even if the action were for specific performance, it was premature for the respondent Judge to dismiss the complaint by reason of the Statute of Frauds despite the explicit allegations of partial payment. As this Court stated in Carbonnel vs. Poncio, et al.: 21

For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such performance and to render a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required to establish such partial performance by documentaryproof before he could have the opportunity to introduce oral testimony on the transaction. Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent.

xxx xxx xxx

When the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to establish by parol evidence the truth of this allegation, as well as the contract itself. "The recognition of the exceptional effect of part performance in taking an oral contract out of the statute of frauds involves the principle that oral evidence is admissible in such cases to prove both the contract and the part performance of the contract" (49 Am. Jur. 927).

We thus rule that an action by a withdrawing party to recover his partial payment of the consideration of a contract, which is otherwise unenforceable under the Statute of Frauds, by reason of the failure of the other contracting party to comply with his obligation, is not covered by the Statute of Frauds.

WHEREFORE, the petition is hereby GRANTED. The challenged Orders of 18 April 1979 and 21 June 1979 in Civil Case No. Q-23593 of the court below are hereby ANNULLED and SET ASIDE, and the complaint in said case is hereby ordered REINSTATED. The default order against private respondent Lolita Lee Le Hua shall stand and private respondent Alberto Dy is ordered to file his Answer to the complaint with the court below within ten (10) days from receipt of this decision. This decision shall be immediately executory.

Costs against private respondents.

IT IS SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 176841 June 29, 2010

ANTHONY ORDUÑA, DENNIS ORDUÑA, and ANTONITA ORDUÑA, Petitioners, vs. EDUARDO J. FUENTEBELLA, MARCOS S. CID, BENJAMIN F. CID, BERNARD G. BANTA, and ARMANDO GABRIEL, JR., Respondents.

D E C I S I O N

VELASCO, JR., J.:

In this Petition for Review1 under Rule 45 of the Rules of Court, Anthony Orduña, Dennis Orduña and Antonita Orduña assail and seek to set aside the Decision2 of the Court of Appeals (CA) dated December 4, 2006 in CA-G.R. CV No. 79680, as reiterated in its Resolution of March 6, 2007, which affirmed the May 26, 2003 Decision3of the Regional Trial Court (RTC), Branch 3 in Baguio City, in Civil Case No. 4984-R, a suit for annulment of title and reconveyance commenced by herein petitioners against herein respondents.

Central to the case is a residential lot with an area of 74 square meters located at Fairview Subdivision, Baguio City, originally registered in the name of Armando Gabriel, Sr. (Gabriel Sr.) under Transfer Certificate of Title (TCT) No. 67181 of the Registry of Deeds of Baguio City.4

As gathered from the petition, with its enclosures, and the comments thereon of four of the five respondents,5 the Court gathers the following relevant facts:

Sometime in 1996 or thereabouts, Gabriel Sr. sold the subject lot to petitioner Antonita Orduña (Antonita), but no formal deed was executed to document the sale. The contract price was apparently payable in installments as Antonita remitted from time to time and Gabriel Sr. accepted partial payments. One of the Orduñas would later testify that Gabriel Sr. agreed to execute a final deed of sale upon full payment of the purchase price.6

As early as 1979, however, Antonita and her sons, Dennis and Anthony Orduña, were already occupying the subject lot on the basis of some arrangement undisclosed in the records and even constructed their house thereon. They also paid real property taxes for the house and declared it for tax purposes, as evidenced by Tax Declaration No. (TD) 96-04012-1110877 in which they place the assessed value of the structure at PhP 20,090.

After the death of Gabriel Sr., his son and namesake, respondent Gabriel Jr., secured TCT No. T-714998 over the subject lot and continued accepting payments from the petitioners. On December 12, 1996, Gabriel Jr. wrote Antonita authorizing her to fence off the said lot and to construct a road in the adjacent lot.9 On December 13, 1996, Gabriel Jr. acknowledged receipt of a PhP 40,000 payment from petitioners.10 Through a letter11 dated May 1, 1997, Gabriel Jr. acknowledged that petitioner had so far made an aggregate payment of PhP 65,000, leaving an outstanding balance of PhP 60,000. A receipt Gabriel Jr. issued dated November 24, 1997 reflected a PhP 10,000 payment.

Despite all those payments made for the subject lot, Gabriel Jr. would later sell it to Bernard Banta (Bernard) obviously without the knowledge of petitioners, as later developments would show.

As narrated by the RTC, the lot conveyance from Gabriel Jr. to Bernard was effected against the following backdrop: Badly in need of money, Gabriel Jr. borrowed from Bernard the amount of PhP 50,000, payable in two weeks at a fixed interest rate, with the further condition that the subject lot would answer for the loan in case of default. Gabriel Jr. failed to pay the loan and this led to the execution of a Deed of Sale12 dated June 30, 1999 and the issuance later of TCT No. T-7278213 for subject lot in the name of Bernard upon cancellation of TCT No. 71499 in the name of Gabriel, Jr. As the RTC decision indicated, the reluctant Bernard agreed to acquire the lot, since he had by then ready buyers in respondents Marcos Cid and Benjamin F. Cid (Marcos and Benjamin or the Cids).

Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Armed with a Deed of Absolute Sale of a Registered Land14 dated January 19, 2000, the Cids were able to cancel TCT No. T-72782 and secure TCT No. 7278315 covering the subject lot. Just like in the immediately preceding transaction, the deed of sale between Bernard and the Cids had respondent Eduardo J. Fuentebella (Eduardo) as one of the instrumental witnesses.

Marcos and Benjamin, in turn, ceded the subject lot to Eduardo through a Deed of Absolute Sale16 dated May 11, 2000. Thus, the consequent cancellation of TCT No. T-72782 and issuance on May 16, 2000 of TCT No. T-327617 over subject lot in the name of Eduardo.

As successive buyers of the subject lot, Bernard, then Marcos and Benjamin, and finally Eduardo, checked, so each claimed, the title of their respective predecessors-in-interest with the Baguio Registry and discovered said title to be free and unencumbered at the time each purchased the property. Furthermore, respondent Eduardo, before buying the property, was said to have inspected the same and found it unoccupied by the Orduñas.18

Sometime in May 2000, or shortly after his purchase of the subject lot, Eduardo, through his lawyer, sent a letter addressed to the residence of Gabriel Jr. demanding that all persons residing on or physically occupying the subject lot vacate the premises or face the prospect of being ejected.19

Learning of Eduardo’s threat, petitioners went to the residence of Gabriel Jr. at No. 34 Dominican Hill, Baguio City. There, they met Gabriel Jr.’s estranged wife, Teresita, who informed them about her having filed an affidavit-complaint against her husband and the Cids for falsification of public documents on March 30, 2000. According to Teresita, her signature on the June 30, 1999 Gabriel Jr.–Bernard deed of sale was a forgery. Teresita further informed the petitioners of her intent to honor the aforementioned 1996 verbal agreement between Gabriel Sr. and Antonita and the partial payments they gave her father-in-law and her husband for the subject lot.

On July 3, 2001, petitioners, joined by Teresita, filed a Complaint20 for Annulment of Title, Reconveyance with Damages against the respondents before the RTC, docketed as Civil Case No. 4984-R, specifically praying that TCT No. T-3276 dated May 16, 2000 in the name of Eduardo be annulled. Corollary to this prayer, petitioners pleaded that Gabriel Jr.’s title to the lot be reinstated and that petitioners be declared as entitled to acquire ownership of the same upon payment of the remaining balance of the purchase price therefor agreed upon by Gabriel Sr. and Antonita.

While impleaded and served with summons, Gabriel Jr. opted not to submit an answer.

Ruling of the RTC

By Decision dated May 26, 2003, the RTC ruled for the respondents, as defendants a quo, and against the petitioners, as plaintiffs therein, the dispositive portion of which reads:

WHEREFORE, the instant complaint is hereby DISMISSED for lack of merit. The four (4) plaintiffs are hereby ordered by this Court to pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify on these damages), Moral Damages of Twenty Thousand (P20,000.00) Pesos, so that each defendant shall receive Moral Damages of Eighty Thousand (P80,000.00) Pesos each. Plaintiffs shall also pay all defendants (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify on these damages), Exemplary Damages of Ten Thousand (P10,000.00) Pesos each so that eachdefendant shall receive Forty Thousand (P40,000.00) Pesos as Exemplary Damages. Also, plaintiffs are ordered to pay each defendant (except Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J. Fuentebella who did not testify on these damages), Fifty Thousand (P50,000.00) Pesos as Attorney’s Fees, jointly and solidarily.

Cost of suit against the plaintiffs.21

On the main, the RTC predicated its dismissal action on the basis of the following grounds and/or premises:

1. Eduardo was a purchaser in good faith and, hence, may avail himself of the provision of Article 154422 of the Civil Code, which provides that in case of double sale, the party in good faith who is able to register the property has better right over the property;

2. Under Arts. 135623 and 135824 of the Code, conveyance of real property must be in the proper form, else it is unenforceable;

3. The verbal sale had no adequate consideration; and

4. Petitioners’ right of action to assail Eduardo’s title prescribes in one year from date of the issuance of such title and the one-year period has already lapsed.

From the above decision, only petitioners appealed to the CA, their appeal docketed as CA-G.R. CV No. 79680.

The CA Ruling

On December 4, 2006, the appellate court rendered the assailed Decision affirming the RTC decision. The falloreads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the 26 May 2003 Decision of the Regional Trial Court, Branch 3 of Baguio City in Civil Case No. 4989-R is hereby AFFIRMED.

SO ORDERED.25

Hence, the instant petition on the submission that the appellate court committed reversible error of law:

1. xxx WHEN IT HELD THAT THE SALE OF THE SUBJECT LOT BY ARMANDO GABRIEL, SR. AND RESPONDENT ARMANDO GABRIEL, JR. TO THE PETITIONERS IS UNENFORCEABLE.

2. xxx IN NOT FINDING THAT THE SALE OF THE SUBJECT LOT BY RESPONDENT ARMANDO GABRIEL, JR. TO RESPONDENT BERNARD BANTA AND ITS SUBSEQUENT SALE BY THE LATTER TO HIS CO-RESPONDENTS ARE NULL AND VOID.

3. xxx IN NOT FINDING THAT THE RESPONDENTS ARE BUYERS IN BAD FAITH

4. xxx IN FINDING THAT THE SALE OF THE SUBJECT LOT BETWEEN GABRIEL, SR. AND RESPONDENT GABRIEL, JR. AND THE PETITIONERS HAS NO ADEQUATE CONSIDERATION.

5. xxx IN RULING THAT THE INSTANT ACTION HAD ALREADY PRESCRIBED.

6. xxx IN FINDING THAT THE PLAINTIFFS-APPELLANTS ARE LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEY’S FEES.26

The Court’s Ruling

The core issues tendered in this appeal may be reduced to four and formulated as follows, to wit: first, whether or not the sale of the subject lot by Gabriel Sr. to Antonita is unenforceable under the Statute of Frauds; second, whether or not such sale has adequate consideration; third, whether the instant action has already prescribed; and, fourth, whether or not respondents are purchasers in good faith.

The petition is meritorious.

Statute of Frauds Inapplicable to Partially Executed Contracts

It is undisputed that Gabriel Sr., during his lifetime, sold the subject property to Antonita, the purchase price payable on installment basis. Gabriel Sr. appeared to have been a recipient of some partial payments. After his death, his son duly recognized the sale by accepting payments and issuing what may be considered as receipts therefor. Gabriel Jr., in a gesture virtually acknowledging the petitioners’ dominion of the property, authorized them to construct a fence around it. And no less than his wife, Teresita, testified as to the fact of sale and of payments received.

Pursuant to such sale, Antonita and her two sons established their residence on the lot, occupying the house they earlier constructed thereon. They later declared the property for tax purposes, as evidenced by the issuance of TD 96-04012-111087 in their or Antonita’s name, and paid the real estates due thereon, obviously as sign that they are occupying the lot in the concept of owners.

Given the foregoing perspective, Eduardo’s assertion in his Answer that "persons appeared in the property"27only after "he initiated ejectment proceedings"28 is clearly baseless. If indeed petitioners entered and took possession of the property after he (Eduardo) instituted the ejectment suit, how could they explain the fact that he sent a demand letter to vacate sometime in May 2000?

With the foregoing factual antecedents, the question to be resolved is whether or not the Statute of Frauds bars the enforcement of the verbal sale contract between Gabriel Sr. and Antonita.

The CA, just as the RTC, ruled that the contract is unenforceable for non-compliance with the Statute of Frauds.

We disagree for several reasons. Foremost of these is that the Statute of Frauds expressed in Article 1403, par. (2),29 of the Civil Code applies only to executory contracts, i.e., those where no performance has yet been made. Stated a bit differently, the legal consequence of non-compliance with the Statute does not come into play where the contract in question is completed, executed, or partially consummated.30

The Statute of Frauds, in context, provides that a contract for the sale of real property or of an interest therein shall be unenforceable unless the sale or some note or memorandum thereof is in writing and subscribed by the party or his agent. However, where the verbal contract of sale has been partially executed through the partial payments made by one party duly received by the vendor, as in the present case, the contract is taken out of the scope of the Statute.

The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.31 The Statute requires certain contracts to be evidenced by some note or memorandum in order to be enforceable. The term "Statute of Frauds" is descriptive of statutes that require certain classes of contracts to be in writing. The Statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable.32

Since contracts are generally obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present,33 the Statute simply provides the method by which the contracts enumerated in Art. 1403 (2) may be proved but does not declare them invalid because they are not reduced to writing. In fine, the form required under the Statute is for convenience or evidentiary purposes only.

There can be no serious argument about the partial execution of the sale in question. The records show that petitioners had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums of money as partial payments of the purchase price. These payments were duly receipted by Gabriel Jr. To recall, in his letter of May 1, 1997, Gabriel, Jr. acknowledged having received the aggregate payment of PhP 65,000 from petitioners with the balance of PhP 60,000 still remaining unpaid. But on top of the partial payments thus made, possession of the subject of the sale had been transferred to Antonita as buyer. Owing thus to its partial execution, the subject sale is no longer within the purview of the Statute of Frauds.

Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by the acceptance of benefits under the contract.34 Evidently, Gabriel, Jr., as his father earlier, had benefited from the partial payments made by the petitioners. Thus, neither Gabriel Jr. nor the other respondents—successive purchasers of subject lots—could plausibly set up the Statute of Frauds to thwart petitioners’ efforts towards establishing their lawful right over the subject lot and removing any cloud in their title. As it were, petitioners need only to pay the outstanding balance of the purchase price and that would complete the execution of the oral sale.

There was Adequate Consideration

Without directly saying so, the trial court held that the petitioners cannot sue upon the oral sale since in its own words: "x x x for more than a decade, [petitioners] have not paid in full Armando Gabriel, Sr. or his estate, so that the sale transaction between Armando Gabriel Sr. and [petitioners] [has] no adequate consideration."

The trial court’s posture, with which the CA effectively concurred, is patently flawed. For starters, they equated incomplete payment of the purchase price with inadequacy of price or what passes as lesion, when both are different civil law concepts with differing legal consequences, the first being a ground to rescind an otherwise valid and enforceable contract. Perceived inadequacy of price, on the other hand, is not a sufficient ground for setting aside a sale freely entered into, save perhaps when the inadequacy is shocking to the conscience.35

The Court to be sure takes stock of the fact that the contracting parties to the 1995 or 1996 sale agreed to a purchase price of PhP 125,000 payable on installments. But the original lot owner, Gabriel Sr., died before full payment can be effected. Nevertheless, petitioners continued remitting payments to Gabriel, Jr., who sold the subject lot to Bernard on June 30, 1999. Gabriel, Jr., as may be noted, parted with the property only for PhP 50,000. On the other hand, Bernard sold it for PhP 80,000 to Marcos and Benjamin. From the foregoing price figures, what is abundantly clear is that what Antonita agreed to pay Gabriel, Sr., albeit in installment, was very much more than what his son, for the same lot, received from his buyer and the latter’s buyer later. The Court, therefore, cannot see its way clear as to how the RTC arrived at its simplistic conclusion about the transaction between Gabriel Sr. and Antonita being without "adequate consideration."

The Issues of Prescription and the Bona Fides of the Respondents as Purchasers

Considering the interrelation of these two issues, we will discuss them jointly.

There can be no quibbling about the fraudulent nature of the conveyance of the subject lot effected by Gabriel Jr. in favor of Bernard. It is understandable that after his father’s death, Gabriel Jr. inherited subject lot and for which he was issued TCT No. No. T-71499. Since the Gabriel Sr. – Antonita sales transaction called for payment of the contract price in installments, it is also understandable why the title to the property remained with the Gabriels. And after the demise of his

father, Gabriel Jr. received payments from the Orduñas and even authorized them to enclose the subject lot with a fence. In sum, Gabriel Jr. knew fully well about the sale and is bound by the contract as predecessor-in-interest of Gabriel Sr. over the property thus sold.

Yet, the other respondents (purchasers of subject lot) still maintain that they are innocent purchasers for value whose rights are protected by law and besides which prescription has set in against petitioners’ action for annulment of title and reconveyance.

The RTC and necessarily the CA found the purchaser-respondents’ thesis on prescription correct stating in this regard that Eduardo’s TCT No. T-3276 was issued on May 16, 2000 while petitioners filed their complaint for annulment only on July 3, 2001. To the courts below, the one-year prescriptive period to assail the issuance of a certificate of title had already elapsed.

We are not persuaded.

The basic complaint, as couched, ultimately seeks the reconveyance of a fraudulently registered piece of residential land. Having possession of the subject lot, petitioners’ right to the reconveyance thereof, and the annulment of the covering title, has not prescribed or is not time-barred. This is so for an action for annulment of title or reconveyance based on fraud is imprescriptible where the suitor is in possession of the property subject of the acts,36 the action partaking as it does of a suit for quieting of title which is imprescriptible.37 Such is the case in this instance. Petitioners have possession of subject lots as owners having purchased the same from Gabriel, Sr. subject only to the full payment of the agreed price.

The prescriptive period for the reconveyance of fraudulently registered real property is 10 years, reckoned from the date of the issuance of the certificate of title, if the plaintiff is not in possession, but imprescriptible if he is in possession of the property.38 Thus, one who is in actual possession of a piece of land claiming to be the owner thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right.39As it is, petitioners’ action for reconveyance is imprescriptible.

This brings us to the question of whether or not the respondent-purchasers, i.e., Bernard, Marcos and Benjamin, and Eduardo, have the status of innocent purchasers for value, as was the thrust of the trial court’s disquisition and disposition.

We are unable to agree with the RTC.

It is the common defense of the respondent-purchasers that they each checked the title of the subject lot when it was his turn to acquire the same and found it clean, meaning without annotation of any encumbrance or adverse third party interest. And it is upon this postulate that each claims to be an innocent purchaser for value, or one who buys the property of another without notice that some other person has a right to or interest in it, and who pays therefor a full and fair price at the time of the purchase or before receiving such notice.40

The general rule is that one dealing with a parcel of land registered under the Torrens System may safely rely on the correctness of the certificate of title issued therefor and is not obliged to go beyond the certificate.41 Where, in other words, the certificate of title is in the name of the seller, the innocent purchaser for value has the right to rely on what appears on the certificate, as he is charged with notice only of burdens or claims on the res as noted in the certificate. Another formulation of the rule is that (a) in the absence of anything to arouse suspicion or (b) except where the party has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry or (c) when the purchaser has knowledge of a defect of title in his vendor or of sufficient facts

to induce a reasonably prudent man to inquire into the status of the title of the property,42 said purchaser is without obligation to look beyond the certificate and investigate the title of the seller.

Eduardo and, for that matter, Bernard and Marcos and Benjamin, can hardly claim to be innocent purchasers for value or purchasers in good faith. For each knew or was at least expected to know that somebody else other than Gabriel, Jr. has a right or interest over the lot. This is borne by the fact that the initial seller, Gabriel Jr., was not in possession of subject property. With respect to Marcos and Benjamin, they knew as buyers that Bernard, the seller, was not also in possession of the same property. The same goes with Eduardo, as buyer, with respect to Marcos and Benjamin.ten.lihpw a1

Basic is the rule that a buyer of a piece of land which is in the actual possession of persons other than the seller must be wary and should investigate the rights of those in possession. Otherwise, without such inquiry, the buyer can hardly be regarded as a buyer in good faith. When a man proposes to buy or deal with realty, his duty is to read the public manuscript, i.e., to look and see who is there upon it and what his rights are. A want of caution and diligence which an honest man of ordinary prudence is accustomed to exercise in making purchases is, in contemplation of law, a want of good faith. The buyer who has failed to know or discover that the land sold to him is in adverse possession of another is a buyer in bad faith.43

Where the land sold is in the possession of a person other than the vendor, the purchaser must go beyond the certificates of title and make inquiries concerning the rights of the actual possessor.44 And where, as in the instant case, Gabriel Jr. and the subsequent vendors were not in possession of the property, the prospective vendees are obliged to investigate the rights of the one in possession. Evidently, Bernard, Marcos and Benjamin, and Eduardo did not investigate the rights over the subject lot of the petitioners who, during the period material to this case, were in actual possession thereof. Bernard, et al. are, thus, not purchasers in good faith and, as such, cannot be accorded the protection extended by the law to such purchasers.45 Moreover, not being purchasers in good faith, their having registered the sale, will not, as against the petitioners, carry the day for any of them under Art. 1544 of the Civil Code prescribing rules on preference in case of double sales of immovable property. Occeñav. Esponilla46 laid down the following rules in the application of Art. 1544: (1) knowledge by the first buyer of the second sale cannot defeat the first buyer’s rights except when the second buyer first register in good faith the second sale; and (2) knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register, since such knowledge taints his registration with bad faith.

Upon the facts obtaining in this case, the act of registration by any of the three respondent-purchasers was not coupled with good faith. At the minimum, each was aware or is at least presumed to be aware of facts which should put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor.

The award by the lower courts of damages and attorney’s fees to some of the herein respondents was predicated on the filing by the original plaintiffs of what the RTC characterized as an unwarranted suit. The basis of the award, needless to stress, no longer obtains and, hence, the same is set aside.

WHEREFORE, the petition is hereby GRANTED. The appealed December 4, 2006 Decision and the March 6, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 79680 affirming the May 26, 2003 Decision of the Regional Trial Court, Branch 3 in Baguio City are hereby REVERSED and SET ASIDE. Accordingly, petitioner Antonita Orduña is hereby recognized to have the right of ownership over subject lot covered by TCT No. T-3276 of the Baguio Registry registered in the name of Eduardo J. Fuentebella. The Register of Deeds of Baguio City is hereby ORDERED to cancel said TCT No. T-3276 and to issue a new one in the name of Armando Gabriel, Jr. with the proper

annotation of the conditional sale of the lot covered by said title in favor of Antonita Orduña subject to the payment of the PhP 50,000 outstanding balance. Upon full payment of the purchase price by Antonita Orduña, Armando Gabriel, Jr. is ORDERED to execute a Deed of Absolute Sale for the transfer of title of subject lot to the name of Antonita Orduña, within three (3) days from receipt of said payment.

No pronouncement as to costs.

SO ORDERED.