BANK OF THE PHILIPPINE ISLANDS

VS. BENJAMIN PINEDA

G.R. No. L-62441
156 SCRA 404

FACTS:
Southern Industrial Project (SIP) and/or Bacong
purchased the vessels SS "Southern Comet," SS "Southern
Express" and SS "Southern Hope," thru financing furnished by
defendant Peoples Bank and Trust Company, now the Bank of
the Philippine Islands. To secure the payment of whatever
amounts maybe disbursed for the aforesaid purpose, the said
vessels were mortgaged to Peoples Bank and Trust Company.
For the operation of the said vessels, these were placed under
the booking agency of defendant Interocean Shipping
Corporation, with the undertaking that the freight revenues
from their charter and operation shall be deposited with the
Trust Department of Peoples Bank and Trust Company and
that disbursements made there from shall be covered by
vouchers bearing the approval of SIP. As Peoples Bank and
Trust Company and SIP were not satisfied with the amount of
revenues being deposited with the said Bank, it being
suggested that diversions thereof were being made, Gregorio
A. Concon of SIP and/or Bacong and Roman Azanza of
Peoples Bank and Trust Company, organized S.A. Gacet, Inc.
to manage and supervise the operation of the vessels with
Ezekiel P. Toeg as the manager thereof. Accordingly, on
August 15, 1966, a Management Contract was entered into
between SIP and GACET, Inc., placing the supervision and
management of the aforementioned vessels in the hands of
GACET, Inc., which was to run for a period of six (6) months,
renewable at the will of the parties, without however,
terminating the booking agency of Interocean Shipping
Corporation. Likewise, under the terms of said Management
Contract, the Peoples Bank and Trust Company was
designated as depository of all revenues coming from the
operation of the subject vessels thereby enabling it to control
all expenses of GACET, Inc., since they win all be drawn
against said deposit.
During the period comprising March 16, 1967 and
August 25, 1967, GACET and Interocean in performing their
obligations under said Management Contract, contracted the
services of herein plaintiff-appellee, Benjamin Pineda doing
business under the name and style "Pioneer Iron Works," to
carry out repairs, fabrication and installation of necessary parts
in said vessels in order to make them seaworthy and in good
working operation. Accordingly, repairs on the vessels were
made. Labor and materials supplied in connection therewith,
amounted to P84,522.70, P18,141.75 of which was advanced
by Interocean, thereby leaving a balance of P62,095.95. For
this balance, Interocean issued three checks and the third one
for P 17,377.57. When these checks were however presented
to the drawee, Peoples Bank and Trust Company, they were
dishonored as defendant Interocean stopped payment thereon.
Meanwhile and by reason of the inability of SIP and/or
Bacong to pay their mortgage indebtedness which was past
due since 1964, the mortgagee Peoples Bank and Trust
Company threatened to foreclose the mortgage on said
vessels. In order to avoid the inconvenience and expense of
imminent foreclosure proceedings, SIP and/or Bacong sold
said vessels to Peoples Bank by way of dacion en pago. The
sale is evidenced by three (3) deeds of sale all dated January
19, 1968 (Exhs. C, D, & E). Immediately preceding the
execution of said deeds of sale, SIP, Bacong and Peoples

Bank executed a "Confirmation of Obligation" (Exh. "B")

whereby SIP and Bacong (1) acknowledged being indebted to
defendant bank, the payment of which indebtedness was
secured by chattel mortgages on said vessels, (2) agreed to
sell and convey to defendant bank the aforementioned vessels
by separate deed of sale for the total purchase price of P
3,038,000.00 to be applied as partial payment on account of
their mortgage indebtedness; and (3) expressly recognized
that after such application, a substantial balance will still
remain unpaid and owing by SIP and Bacong which remaining
balance they have agreed to confirm and pay to the bank on
demand with 12% interest per annum.
On October 1, 1968, plaintiff instituted the present
action (Civil Case No. 74379) before the Court of First Instance
of Manila, seeking to recover from SIP, GACET, Interocean and
the Peoples Bank and 'Trust Company the principal sum of
P62,095.92 with interests thereon from the respective dates of
each repair order until the same is fully paid, which amount
was allegedly the total unpaid balance of the cost of repairs,
fabrication and installation of necessary parts carried out by
the said plaintiff on the a forenamed vessels.
Answering the complaint, defendants Peoples Bank
and Trust Co., now Bank of P.I. and Southern Industrial
Projects, Inc. (SIP) alleged that the abovementioned claim is
the personal responsibility of Interocean Shipping Corporation
and/or Gacet, Inc. and deny liability thereof Defendant Bacong
Shipping Company, S.A.
The trial court rendered a decision dismissing the
compliant against defendants Interocean Shipping Corporation
and Gacet, Inc.
Defendants Bank of P.I. and Southern Industrial
Projects, Inc. appealed to the Court of Appeals but the latter,
finding the aforequoted decision to be in accordance with law
and the evidence, affirmed the same.

ISSUE:
Whether or not the Intermediate Appellate Court erred
in affirming the ruling of the lower court that petitioner is liable
to private respondent when the same was based on an
erroneous interpretation of the "confirmation of obligation" in
relation to the deeds of sale of the vessels.

RULING:
There is no question that at the time subject obligation
was incurred, the vessels were owned by defendant Southern
industrial Projects, Inc. although mortgaged to People's Bank
and Trust Company. Hence, the former as owner is liable for
the costs of repairs made on the vessels. On the other hand,
Interocean Shipping Corporation and S.A. Gacet undeniably
mere agents of the owner, a disclosed principal, cannot be held
liable for repairs made on the vessels to keep them in good
running condition in order to earn revenue, there being no
showing that said agents exceeded their authority.
Ultimately therefore, the issue which remains
whether or not People's Bank, now Bank of P.I. being
purchaser of said vessels, is jointly and severally liable for
outstanding balance of said repairs, admittedly a lien on
properties in question.

is,
the
the
the

It appears that Bank of P.I. seeks shelter in a deed of

"Confirmation of Obligation" entered into between buyer and
seller before the execution of a deed of sale between them.
Buyer, Bank of P.I., maintains that it has the option of whether
or not to pay the obligations listed thereunder, one of which is
the repairs undertaken by private respondent, as inferred from
the phrase that the owner of the vessels merely authorized
petitioner bank to pay certain expenses and charges in
connection with said vessels. The latter stressed the fact that
nowhere in said deed was the bank placed under obligation to
pay any of the listed indebtedness of the owner.
The cardinal rule in the interpretation of contracts is to
the effect that the intention of the contracting parties should
always prevail because their will has the force of law between
them (Kasilag vs. Rodriguez, et al., 69 Phil. 217 [1939]; Sec.
10, Rule 130 of the New Rules of Court). Thus, in order to
judge the intention of the contracting parties, regard must be
had principally to their acts both contemporaneous and
subsequent to the contract (Atlantic Gulf Co. vs. Insular
Government, 10 Phil. 166 [1908]), "the circumstances under
which it was made, including the situation of the subject thereof
and of the parties to it, may be shown, so that the judge may
be placed in the position of those whose language he is to
interpret." (Sec. 11, Rule 130 of the New Rules of Court). It has
been held that once this intention of the parties has been
ascertained, it becomes an integral part of the contract as
though it has been originally expressed therein in unequivocal
terms (Nielson & Co., Inc. vs. Lepanto Consolidated Mining
Co., 18 SCRA 1040 [19661). Likewise, well settled is the fact
that in construing a writing particularly a written agreement, the
reason behind the circumstances surrounding its execution are
of paramount importance to place the interpreter in the
situation of the parties concerned at the time the writing was
executed (Vicente Gotamco Hermanos vs. Shotwell 38 SCRA
107 [1971]),
It is undisputed that S.A. Gacet, Inc., the managing
corporation, is only a creation of Gregorio A. Concon of
Southern Industrial Projects, Inc. and of Roman Azanza of
People's Bank and Trust Company obviously for the protection
of their respective interests on the properties in question, after
both expressed dissatisfaction with the amount of revenue
being deposited with the said bank which suggests that
diversions thereof were being made. Thus, although it was SIP
and GACET which entered into the Management Contract, it
was expressly stipulated thereunder, among others, that
GACET may not borrow money for the husbanding of vessels
without special authority from the petitioner bank. In addition,
all office records were required to be subject to inspection and
complete audit by the latter, including all remittances made by
the Shipper to the booking agent. Otherwise stated, petitioner
was already in control of the vessels as early as August 15,
1966, the date the Management Contract was signed
(Decision, CA G.R No. 66365-R), (Rollo, p. 28). In fact, the
contract itself for the repairs of the vessels which is now the
bone of contention, was entered into by GACET and
INTEROCEAN with private respondent Benjamin Pineda with
the approval of petitioner Bank. This lends credence to the
claim of Pineda that he was led to believe that he will be paid
the corresponding amount for the repairs, as in fact he was
paid with checks which were later dishonored.
The records show that SIP incurred debts by reason
of these vessels not only here in the Philippines but also in
Japan, notably ESSO Standard Eastern which attached said
vessels in Japan. As admitted by Gregorio A. Concon, fourteen
banks were after the assets of the corporation. Under this

distressed financial condition and with People's Bank also

threatening to foreclose the mortgages on these vessels, SIP
decided to sell the vessels to People's Bank (Record on
Appeal, pp. 55-56). But a deed of "Confirmation of Obligation"
was first entered into between SIP and/or Bacong Shipping
and People's Bank, confirming and acknowledging the
obligations outstanding at the time, among which is the
obligation to private respondent in the amount corresponding
to the repairs in question.
Petitioner however insists on its theory based on a
separate interpretation of the deed of "Confirmation of
Obligation" that on the authority granted thereunder by the
seller (the previous owner), responsibility to pay the listed
obligation was not compulsory or mandatory (Record on
Appeal, pp. 59- 60).
Other fundamental rules in the interpretation of
contracts no less important than those already indicated are to
the effect that where the terms are doubtful, the various
stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result
from all of them taken jointly (Art. 1374, Civil Code), and if
some stipulation of any contract should admit of several
meanings, it shall be understood as having that import which is
most adequate to render it effectual (Art. 1373, Civil Code) and
the words which may have different significations shall be
understood in that which is most in keeping with the nature and
object of the contract (Art. 1375, Civil Code). The reason for
these rules is that it must be presumed that the parties had
intended an effective act and not one that is impracticable or
illusory (Caguioa Comments and Cases on Civil Law, p.
592,1983 Ed.).
It will be observed that the deed of "Confirmation of
Obligation" is but a part or a corollary to the deeds of sale of
the three vessels. In fact, specific reference thereto was made
by said deeds of sale as to the settlement of obligations,
among which are the repairs in question. Said provision in the
deeds of sale reads:
Any amount or amounts that the Bank has
voluntarily paid and/or has been compelled
to pay, or hereafter will voluntarily and/or will
be compelled to pay for any encumbrance,
claim, lien or particular average in order to
save the vessel from any legal seizure or
suits by third parties, and for any repair,
supplies, provisions, accrued salaries and
allotment of crew, cost of bailing out of the
vessel, and any other expenses or accounts
of the said vessel, shall be for the account of
Southern and/or Bacong in accordance with
their agreement preceding this conveyance
executed on January 19, 1968 ...
It will be observed that the above stipulation
interpreted together with the deed of "Confirmation of
Obligation" leaves no room for doubt that while the bank may
indeed pay certain obligations voluntarily or by choice, there
are those that the Bank will be compelled to pay to save the
vessel from any legal seizure or suits by third parties. In other
words, the primary purpose of the contracts is the protection of
the vessels. Among them are liens on the same under which
the obligation to private respondent properly belongs.

of the improvements on the land acquired as homestead, the

parties having moreover, agreed upon the pacts and conditions
stated in the deed. In other words, the parties entered into a
contract of mortgage of the improvements on the land acquired
as homestead, to secure the payment of the indebtedness for
P1,000 and the stipulated interest thereon.

Kasilag vs Rodriguez (69 Phil 217)

FACTS:
PROCEDURAL FACTS: This is an appeal taken by the
defendant-petitioner (Kasilag) from the decision of the Court of
Appeals which modified that rendered by the court of First
Instance of Bataan. The said court held: that the contract is
entirely null and void and without effect; that the plaintiffsrespondents (Rodriguez, et.al.), then appellants, are the
owners of the disputed land, with its improvements, in common
ownership with their brother Gavino Rodriguez, hence, they
are entitled to the possession thereof; that the defendantpetitioner should yield possession of the land in their favor, with
all the improvements thereon and free from any lien.
SUBSTANTIVE FACTS: The parties entered into a contract of
loan to which has an accompanying accessory contract of
mortgage. The executed accessory contract involved the
improvements on a piece land, the land having been acquired
by means of homestead. Petitioner for his part accepted the
contract of mortgage.
Believing that there are no violations to the prohibitions in the
alienation of lands Petitioner, acting in good faith took
possession of the land. To wit, the Petitioner has no knowledge
that the enjoyment of the fruits of the land is an element of the
credit transaction of Antichresis.

ISSUES:
1.
Whether or not the principal contract entered into is null
and void.
2.

Whether or not the subsequent contract is null and void.

3. Whether or not the Kasilag is a possessor in good faith of

the land.
HELD:
1. The cardinal rule in the interpretation of contracts is to the
effect that the intention of the contracting parties should always
prevail because their will has the force of law between them.
Article 1281 (now Art. 1370) of the Civil Code consecrates this
rule and provides, that if the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the
literal sense of its stipulations shall be followed; and if the
words appear to be contrary to the evident intention of the
contracting parties, the intention shall prevail. The contract
should be interpreted in accordance with these rules. As the
terms thereof are clear and leave no room for doubt, it should
be interpreted according to the literal meaning of its clauses.
The words used by the contracting parties in the contract
clearly show that they intended to enter into the principal
contract of loan in the amount of P1,000, with interest at 12 per
cent per annum, and into the accessory contract of mortgage

Another fundamental rule in the interpretation of contracts, not

less important than those indicated, is to the effect that the
terms, clauses and conditions contrary to law, morals and
public order should be separated from the valid and legal
contract and when such separation can be made because they
are independent of the valid contract which expresses the will
of the contracting parties.
Principal contract is that of loan and the accessory that of
mortgage of the improvements upon the land acquired as a
homestead. There is no question that the first of these contract
is valid as it is not against the law.

2.
Parties entered into another verbal contract whereby the
petitioner was authorized to take possession of the land, to
receive the fruits thereof and to introduce improvements
thereon, provided that he would renounce the payment of
stipulated interest and he would assume payment of the land
tax. The possession by the petitioner and his receipt of the
fruits of the land, considered as integral elements of the
contract of antichresis, are illegal and void agreements
because the contract of antichresis is a lien and such is
expressly prohibited by section 116 of Act No. 2874.

3. Despite the foregoing, SC found the defendant-petitioner

Kasilag as a possessor of the land in good faith. Sec 433 of the
Civil Code of the Philippines provides Every person who is
unaware of any flaw in his title or in the manner of its
acquisition by which it is invalidated shall be deemed a
possessor of good faith. And in this case, the petitioner acted
in good faith. Good faith maybe a basis of excusable ignorance
of the law, the petitioner acted in good faith in his enjoyment of
the fruits of the land to which was done through his apparent
acquisition thereof.

1946 until full payment, and the costs. Defendant's

counterclaim is dismissed.
The Court of Appeals made the following findings of fact:

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-22519 March 27, 1971

VICENTE GOTAMCO HERMANOS, petitioner,
vs.
IRMA ROHDE SHOTWELL, assisted by her husband,
ANSELMO M. SHOTWELL, respondents.
Jose W. Diokno for petitioner.
Nicolas Belmonte for respondents.

DIZON, J.:
The case at bar was commenced in the Court of First Instance of
Manila by lrma Rohde Shotwell, assisted by her husband,
ANSELMO M. Shotwell, against the partnership Vicente Gotamco
Hermanos hereinafter referred to simply as Gotamco for the
final liquidation and payment of the unpaid balance of a pre-war
loan, secured by mortgage, granted to the latter wayback in 1926
by William J. Rohde, plaintiff's father. In its answer Gotamco
Hermanos relied mainly on the defense of (a) payment, and (b) on
the claim that whatever reservation was made by its creditor
regarding the revaluation of payments made was subject to the
condition that there should be a law enacted governing revaluation
of payments of pre-war monetary obligations with Japanese
military notes, and that no such legislation has ever been enacted.
After trial upon the issue thus joined, the court rendered judgment
as follows:

The loan was originally for P85,000.00 bearing interest at

9% per annum and was secured by a mortgage on real
estate situated in Manila. Initially, the loan was payable
within three years from February 24, 1926, but the period
was several times extended at the request of the debtor,
the last extension being for two years from February 24,
1942. The rate of interest was reduced to 8% per year
from 1932. Before the last war, only the interests were
paid, quarterly, up to the third quarter of 1941 (Exhs. 0 to
J).
On April 28, 1942, upon written request of defendant on
the ground that it then had a very low income, temporary
reduction of the interests by 50% was granted (Exh. F).
Accordingly, payments were made and accepted
thereafter from May 11, 1942, which were expressly
applied to cover 50% of the stipulated interests only,
which were computed quarterly up to and including the
last quarter of 1942 at P850.00 per quarter (Exhs. E to X
for plaintiffs, also marked Exhs. 2 to 15 defendant).
On October 2, 1943 defendant delivered the amount of
P1,800.00 in Japanese war notes as payment of the
interests for three quarters (January to September,
1943), which was received for the creditor by plaintiff
Irma Rohde Shotwell and her husband Anselmo
Shotwell. Irma signed on behalf of the creditor the
covering receipt (Exh. Y) dated October 2, 1943, which
was also presented in evidence as Exh. 16 by defendant.
After the payment appearing on Exh. Y (October 2, 1943)
the following amounts only, were admittedly paid in 1944,
also in Japanese war notes, to wit:
Date of Payment Amount Coveting Receipt
January 3, 1944 P 5,000.0 Exhibit Z
March 14, 1944 3,000.00 Exhibit AA
April 17, 1944 5,000.00 Exhibit BB
May 19, 1944 17,000.00 Exhibit CC
TOTAL P30,000.00
In 1945 and 1946 plaintiffs admittedly received from
defendant the following payments in Philippine currency:
Date of Payment Amount Covering Receipt

WHEREFORE, judgment is rendered in favor of plaintiff

and against the defendant ordering the latter to pay
plaintiffs the sum of P7,879.33, unpaid balance as of
April 30, 1945 with interest at 8% per annum from May 1,
1945 until paid, payable monthly with penalty of 1% per
month on the unpaid accrued interest and costs.

June 25, 1945 P 1,000.00 Exhibit DD

June 27, 1945 2,000.00 Exhibit EE
September 15, 1945 10,000.00 Exhibit FF
April 24, 1946 20,000.00 Exhibit GG
April 30, 1946 23,120.00 Included in Exhibit HH

Gotamco appealed to the Court of Appeals where, in due time, the

appealed decision - modifying that of the trial court was
rendered . Its dispositive part is of the following tenor:

The mortgagee, William J. Rohde, died on July 16, 1945

leaving as survivors his wife, Isabel Salgado de Rohde,
and their only child, Irma Rohde Shotwell. The widow
died in 1947, survived by the only daughter, herein
plaintiff Irma.

WHEREFORE, the appealed judgment is modified and

defendant is hereby ordered to pay plaintiffs the sum of
P42,474.45 with interests at 8% per annum from May 1,

On April 30, 1946 a deed entitled "Release of Mortgage"

(Exhibit HH for plaintiff, Exh. 1 for defendant) was
executed by Isabel Salgado de Rohde and Immaculada

Rohde, (the same plaintiff Irma), stating the receipt of

P42,000.00 on account of the principal and P1,120.00 on
account of the interests from January 1, 1946 to April 30,
1946. There is no question that the sum of P43,120.00
mentioned in the said release of mortgage consisted of
the P20,000.00 paid on April 24, 1946 (Exh. GG), and the
P23,120.00 paid on April 30, 1946. This was the last
payment.
As there appeared no question as to the original amount of the
mortgage debt and the total amount actually paid including
payment of the interests due up to September 30, 1943 the
Court of Appeals summed up the controverted points submitted for
its resolution as follows:
(a) Defendant contends that the interests from October 1,
1943 to December 31, 1945 were totally condoned by the
creditor; while plaintiffs contend that there has been no
such total condonation and that, on the contrary, the 50%
reduction ceased from October 1, 1943;
(b) Defendant contends that the 1944 payments totalling
P30,000.00 in Japanese war notes were entirely applied
to the principal, at par with the Philippine Peso; while
plaintiffs contend that the application of the payments to
interests and to principal was held in abeyance, because
they were accepted subject to revaluation to be made
after the war, to be then applied first to interest and then
to the principal;
(c) Defendant contends that plaintiffs' right to revaluation
of the 1944 payments was dependent upon the
enactment of a law which would provide for such
revaluation, but no such law has been enacted and that
the receipts and the release of mortgage (Exh. HH: Exh.
1) contain no reservation for revaluation such that
plaintiffs are precluded from claiming such revaluation as
well as the interests; while plaintiffs contend that their
right to the revaluation of the 1944 payments start from
the agreement between the parties, as well as from the
readjustment clause (Sec. 8, Art. XI) of the Constitution
of the war time Republic of the Philippines, and their right
to unsatisfied interests emanates from the loan contract,
and that the receipts and the release of mortgage did not,
and do not, bar the revaluation of the 1944 payments and
collection of the unsatisfied, interests, which were
precisely made and intended to be in accordance with
said agreement, as in fact they left the door open for, and
contemplated, further readjustment and final settlement
of the obligation.
The first and second points are obviously intimately related in the
sense that if it is true that the interests on the balance of the
mortgage debt, from October 1, 1943 to December 31, 1945, were
totally condoned by the creditor, it would necessarily follow that the
1944 payments made by Gotamco totalling P30,000.00 in
Japanese war notes must be deemed to have been entirely
applied to the principal obligation. In reality, therefore, the following
are the question decisive of the whole case: (a) the alleged total
condonation of the interests, and (b) whether the revaluation of the
1944 payments is in order in the light of the facts of the case.
Petitioner's position in relation to the above questions is that the
interests from October 1, 1943 to December 31, 1945 were totally
condoned; that the 1944 payments made in Japanese war notes
were not subject to revaluation; that their total amount together
with the post-liberation payments should be applied to the balance
due on the mortgage debt; that the result would be the full
satisfaction of its obligation.

On the other hand, respondent's contention is that there was no

condonation of the interests due from October 1, 1943 to
December 31, 1945; that the 1944 payments were not and should
not entirely be applied to the principal obligation because they
were intended for both such principal obligation and the interests
due thereon, without any specific application to either, by reason of
the agreement between the parties to revaluate them after the war;
that only after such revaluation could any specific portion of the
payments aforesaid be applied to interests and to the principal
obligation; that by doing so the result would be that petitioner's
obligation has not been fully satisfied.
On the question of total condonation of interests the trial court's
finding against petitioner was affirmed by the Court of Appeals who
also found and declared that there had been no such total
condonation of interests at all. While the findings of fact of the
Court of Appeals are not reviewable on appeal, we have
nevertheless carefully considered the opposing views expounded
by the parties in their briefs in relation to this particular matter, in
view of its decisive influence upon the resolution of this appeal.
After doing so, we feel satisfied that both courts were right.
Petitioner's case rests entirely on the testimony of Go Lang, its
general manager, which the Court of Appeals found to be unworthy
of credence. The following portion of the appealed decision fully
justifies said court's opinion:
At first Go Lang testified that the total condonation was
granted in writing, and when pressed for the writing he
pointed to Exhibit F; but, when he realized that Exhibit F
dealt only with 50% reduction and did not even mention
total condonation, he changed his testimony saying that
total condonation was verbally requested by the debtor
and verbally granted by the creditor also in 1942 in the
early part of the Japanese occupation, effective October,
1943 to December, 1945. This is incredible.
Lending additional support to the Court of Appeals' decision on the
point under consideration are the following facts:
(a) It is not disputed that between the mortgage William J. Rohde
and the respondent partnership, friendly relations existed before
the war and up to the former's death. This notwithstanding,
respondent's request for a partial reduction of the rate of interests
as well as the mortgagee's assent thereto were reduced into
writing. If subsequently there was, as respondent claims, a total
condonation of interests, it is but logical to expect that the parties
would have reduced their agreement to that effect also in writing.
And yet, as already stated before, all that respondent can rely
upon now is the biased and untrustworthy testimony of its general
manager.
(b) The 50% reduction of the stipulated rate of interests was due,
according to respondent's own letter of April 28, 1942 (Exh. A), to
its depleted income and poor financial condition at that time, and
the reduction asked and granted was intended to be temporary. In
relation to these factors there is ample evidence in the record, as
found by the Court of Appeals, that prior to October 1943 and
thereafter, respondent's business and income had improved to
such an extent that it was able to pay and liquidate in full a good
portion of its pre-war obligations "to the tune of hundreds of
thousands of pesos." Consequently, We can not but agree with
said court when it said that while the 50% reduction of the rate of
interests was understandable on April 28, 1942, there was
obviously no reason neither for its indefinite continuation nor for a
total condonation of the interests from October 1943 and
thereafter. What would seem to be logical instead is the
resumption of the full stipulated rate of interests. Indeed, it appears
in this connection that when the payment of P1,800.00 covered by
the receipt Exhibit Y was made on October 2, 1943 for the
interests due from January 1 to September 30 of the year 1943,

Attorney Shotwell to whom the matter of accepting the payment

was referred by his parents-in-law, Mr. & Mrs. Rohde brought up
the unfairness of petitioner's paying its obligation in Japanese war
notes and at a reduced rate of interest, the ever declining value of
said war notes being well-known to everybody at that time.
Shotwell the Court of Appeals found accepted the payment
with reluctance and only with the understanding that it was to be
the last payment at par and at the reduced rate of interest, and that
subsequent payments would be subject to revaluation after the
war. Accordingly, the Court of Appeals further found in this
connection that the P5,000.00 evidenced by Exhibit 2 paid on
January 15. 1944 and the subsequent amounts of P3,000.00 paid
on March 14, 1944 (Exh. AA), P5,000.00 paid on April 17, 1944
(Exh. BB) and P17,000.00 paid on May 19, 1944 (Exh. CC) were
all made and accepted under the understanding that the reduction
of the rate of interests had ceased; that, instead, the originally
stipulated rate of 8% per year was to apply from. October 1, 1943,
and that the Japanese war notes received were to be revaluated
after the war. This, according to the court. was the reason why the
aforesaid payments made in the year 1944 were not, as shown by
the above-mentioned receipts, prepared by respondent's own
accountant, the subject of specific application to either interests or
principal something possible to do only after revaluation of the
amounts paid.
But petitioner advances the contention that respondent's right to a
revaluation of the 1944 payments was dependent upon the
enactment of a law providing for such revaluation, and that no
such law having thus far been enacted and inasmuch as the
receipts evidencing said payments as well as the release of
mortgage contained no reservation for such revaluation, the
respondent is now precluded from claiming a right to it. It is
respondent's contention in this regard, on the other hand, that the
right to the revaluation of the 1944 payments is based upon the
agreement between the parties as well upon the readjustment
clause (Section 8, Article XI) of the war time constitution of the
Republic of the Philippines; and that their right to unpaid interests
is based on the contract of loan itself.
The issue of fact thus arising was the subject of evidence, both
testimonial and documentary presented before the trial court,
bearing principally upon the facts and circumstances surrounding
the payments aforesaid as well as those made after liberation. The
documentary evidence consisted mainly of the corresponding
receipts and the document Exhibit HH releasing the mortgage. On
the basis of all such evidence, the Court of Appeals declared that
the revaluation of the payments already mentioned as well as
respondent's right to the unpaid interests was not intended by the
parties to depend upon the enactment of a law providing for such
revaluation. We quote hereunder with approval the considerations
made by said court as well as its conclusion upon this issue:
Was the right to revaluate the 1944 payments dependent
upon the enactment of a law which would provide
therefor? In thus contending, defendant argued that to
this effect is the wording of the post liberation receipts
and release of mortgage. In maintaining the contrary,
plaintiffs alleged that the said writings do not clearly
express the true intention of the parties, which clearly
appears considering the circumstances surrounding their
execution. To this end, evidence was properly admitted. It
is well settled that in construing a writing, particularly a
written agreement, the reason behind and the
circumstances surrounding its execution are of
paramount importance to place the interpreter in the
situation of the parties concerned at the time the writing
was executed. This brings us to a review of the facts and
circumstances attendant upon the post liberation receipts
and the release of mortgage.
At the time, certain measures were under consideration
by the Government to solve the problem brought about

by the payments in Japanese war notes during the

Japanese occupation of pre-war obligations. Prominent
among them was the Ballantyne proposal. It was
submitted to Congress by the President of the Philippines
with a message and this fact appeared in the Manila
newspapers of June 21, 1945 (Exhs. UU, VV and WW), a
few days before the first liberation payment (Exhibit DD).
The Ballantyne Memorandum (Exhibit BB) advocated for
the revaluation of the Japanese war notes and proposed
the condonation of the interests during the Japanese
occupation. It also contained a schedule of values of the
said war notes in terms of Philippine Peso during
different periods of the Japanese occupation. The
evidence discloses that, as it was but natural, the
Ballantyne plan was talked about and taken into account
by Shotwell and Go Lang when the first post-liberation
payment was made on June 25, 1945, as well as during
the other post-liberation payments and when the release
of mortgage was executed.
As above stated, the interests from October 1, 1943 to
December 31, 1945, had not been condoned, and the
reduction of the interests was terminated, while the
stipulated rate of 8% per year was to apply from October
1, 1943; the Japanese war notes received in 1944 were
accepted under the agreement that they were subject to
be revaluated after the war, and, in consonance
therewith, their application was held in abeyance, to be
made upon the revaluation. Under the Constitution,
promulgated in 1943 of the war time Republic of the
Philippines (sec. 3, Art. VIII) which the parties also had in
mind in connection with their agreement to revaluate, the
creditor would be entitled to the revaluation of the 1944
payments. After the liberation, the Rohdes were
financially in no better position than defendant such that
they could forego the revaluation of the 1944 payments
and the unsatisfied interests.lwph1.t The long
standing friendly relations and the actual confidence
continued between the Rohdes and the Gotamcos. While
the Rohdes wanted to have their money, already in
Philippine currency, defendant was interested in the
release of the mortgage to use the property for bigger
loans for defendant's business. The Ballantyne Proposal
mentioned above, then pending consideration by the
Government, was more or less in line with the revaluation
agreement between the parties herein; and Go Lang,
taking the one therefrom, believed that there should be
no interests from October, 1943 to December, 1945, but
was agreeable that there should be interests from
January, 1946, while Shotwell maintained that,
notwithstanding the revaluation, the interests for that
period should also be paid. In this situation, the post
liberation receipts and the release of mortgage (Exhibit
HH) were issued.
Now, is it logical that the parties intended to make the
revaluation of the 1944 payments and the collection of
the aforesaid interests contingent upon the enactment of
a law which would grant such revaluation and interests?
On the part of the creditor, the affirmative, in case no
such law would be enacted, would amount to a waiver or
abandonment of the right to the revaluation to which he
was entitled by virtue of the agreement had since 1944
and also under the readjustment provision of the
Constitution of the war time Republic of the Philippines,
and of the right to the aforesaid interests to which the
creditor was entitled by virtue of the contract of loan. That
the creditor had so intended is difficult to believe. It does
not make sense to say that the creditor intended to
jeopardize the right to the revaluation and the right to the
aforesaid interests, which he already had irrespective of
any new law, so as to lose them in case no such law

would be enacted. On the part of defendant debtor, there

was no justification for it to demand or require the
creditor to agree to such waiver. The more so, taking into
consideration the old standing friendly relations and
mutual confidence which still continued between the
Rohdes and the Gotamcos at that time. Construction
which would amount to impairment or loss of right is not
favored; conservation and preservation, not waiver,
abandonment or forfeiture of a right, is the rule.
The release of mortgage, Exhibit HH, as aptly stated by
the trial court, merely lifted the mortgage lien, and was
not intended to extinguish the obligation; this was left
subsisting for whatever would be the balance upon final
liquidation, although without any more collateral to
secure the same, as the creditor relied upon the solvency
of the defendant.
There is logic and verity in plaintiffs' version and
Shotwell's testimony that the post liberation receipts and
the release of mortgage were not intended to make the
revaluation of the 1944 payments and the collection of
the interests from October, 1943 to December, 1945,
dependent upon the enactment of a law or upon the
adoption of the Ballantyne proposal by the legislature;
and that what the parties had in mind was that they
should wait for the final action of the Government on the
matter inasmuch as it would provide for a way, such as
with respect to the rates or equivalent of the Japanese
war notes in terms of Philippine Peso, to carry out the
revaluation, and a guide for them to determine as to what
they should do with the interests. This is not incompatible
with, and is not excluded by, the reservation in general
terms, contained in the release of mortgage, of the rights
or privileges which may be confer red or granted by
future legislation, executive order or proclamation in favor
of creditors with respect to payments of pre-war
obligations made during the Japanese occupation, and
that was the way the parties understood such
reservation.
That some of the post liberation receipts and the release
of mortgage were prepared by Shotwell is of no
importance, there being no showing purposely they were
made not to clearly express the true intent of the parties.
On the contrary, as Shotwell declared, they were deemed
to be clear enough at that time as the reason, and motive
behind, and the circumstances surrounding, their
execution, which made the parties' intent plain to them,
were still fresh and undisputed in their minds.
On the other hand, the testimony of Go Lang,
defendant's lone witness on the matter, leaves much to
be desired in point of credibility. His evasive and
inconsistent answers and his feigned incredible
ignorance of the existence of the Ballantyne proposal,
which was given general publicity in the Manila
newspapers and has become of common knowledge and
was of paramount importance to him being partner and
general manager of defendant which paid in Japanese
war notes pre-war obligations in big amounts, detract
much from his veracity.
Therefore, the fact that no law has been enacted on the
matter has not affected the right of the creditor herein to
the revaluation of the 1944 payments and to the
collection of the unsatisfied interests from October, 1943.
We are unable to accept petitioner's contention that the above
finding and conclusion are based on a misapprehension and

misinterpretation of the relevant documents and circumstances

prevailing at the time the payments were made.
All the receipts covering the 1944 as well as the post liberation
payments were qualified, the qualification being expressed therein
in substantially the same way. Exhibit DD of April 17, 1944
acknowledges the receipt of the sum of P5,000.00 "a cuenta del
import e del credito impotetario in favor of William J. Rohde. The
other receipts covering 1944 payments (Exhs. Z, AA and C) do not
state that the payments were to be applied entirely to the principal
obligation. To the contrary, they contained the significant reference
to the amount of the principal as amounting to P85.000.00, the
same not having been reduced at any time in anyone of said
receipts, which would have been the case if the payment
evidenced by Exhibit DD and the others that followed were entirely
applied to the satisfaction of the principal obligation, We agree with
both the trial court and the Court of Appeals that these receipts
viewed together show that the intention of the parties was to apply
the payments made to the account of the mortgage credit owing
from Gotamco to William J. Rohde, which mortgage credit
consisted, of course, of the unpaid balance of the loan together
with the unpaid interests.
The receipts covering post-liberation payments were also qualified.
So was the Deed of Release of Mortgage. Exhibits DD, EE, FF
and GG as well as Exhibit HH show no unqualified application of
the payments respectively evidenced by each of them to the
principal obligation. Instead, they show that they were made and
accepted subject to a final re-computation and final liquidation.
It is obvious from the above documents, however, that they are not
entirely as clear as they could have been made. This is the reason
why, in our opinion, it was justified for the Court of Appeals to
determine their real meaning or the intent of the parties in the light
of the attendant facts and circumstances. After doing so, the court
arrived at the conclusion and held that the agreement to revaluate
the payments in question was not intended to be subject to the
enactment of any particular law on revaluation of the Japanese
military notes in relation to the peso of the Philippine genuine
currency, nor upon the formal adoption of the Ballantyne Schedule
by the Legislative Branch of the government. In view of all the facts
disclosed by the record, it is our opinion that the Court of Appeals
did not err in applying the Ballantyne Scale in re-evaluating the
payments made by Gotamco, said scale having been applied also
by this Court in several cases even in the absence of evidence
concerning any definite agreement between the parties as to how
and at what rate the revaluation of payments should be made.
Petitioner Gotamco also invokes the provisions of Article 1110 of
the old Civil Code in support of its contention that respondents are
now barred from claiming the questioned interests due to the
absence of a reservation with respect thereto in the pertinent
receipts and in the release of mortgage.
We find this contention, as did the Court of Appeals, to be
untenable, for the reason that the legal provision relied upon
applies only to a case where the whole amount of the obligation is
deemed cancelled or paid with the amount receipted for. That
situation does not obtain in the present case where the receipts,
including the release of mortgage Exhibit HH, show that the
amounts receipted for did not definitely close Gotamco's account
with its creditor but rather let it open for further re-computation and
liquidation.
Lastly, petitioner claims that the Court of Appeals erred in not
ruling that its claim for attorney's fees is meritorious. In view of
what has been stated heretofore, it is not necessary to deal with
this point in detail.

WHEREFORE, the appealed decision is hereby affirmed, with

costs.

REPUBLIC OF THE PHILIPPINES, Represented by the SOCIAL

SECURITY SYSTEM, petitioner,
vs.
JERRY V. DAVID, respondent.

DECISION

PANGANIBAN, J.:
Under the terms of the subject Contract, "actual possession"
cannot be equated with "actual occupancy." Inasmuch as the
housing unit was physically occupied by parties other than those
intended to be benefited by the housing program of the Social
Security System, there was a clear violation of the Contract. Since
respondent did not comply with his obligations, rescission is
proper.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, assailing the October 9, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 61374. The appellate court
disposed as follows:
"WHEREFORE, the instant appeal is DENIED for lack of
merit. The decision of the Regional Trial Court, Quezon
City, Branch 105, in Civil Case No. Q-96-27031 is hereby
AFFIRMED."3
The Facts
The CA narrated the facts thus:
"x x x [Respondent] Jerry V. David is an employee of the
SSS, formerly assigned at its Membership (Backroom)
Department. Pursuant to its Employees' Housing Loan
Program, SSS awarded David a house and lot located at
North Fairview, Quezon City. A Deed of Conditional Sale
over the subject property was thereafter executed
between the parties.
"On reports that numerous violations have been
committed by some of the housing awardees in
connection with the conditions governing their sales, SSS
conducted an investigation on the matter. The
investigation revealed that in the case of [Respondent]
David, he committed two (2) violations of his deed of
conditional sale, to wit: (1) neither the [respondent] nor
his immediate family resided and/or occupied the said
housing unit, and (2) he allowed a certain Buenaventura
Penus to possess and occupy the property.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 155634

August 16, 2004

"As a consequence of these violations, SSS sent a letter

to David formally revoking, terminating and/or rescinding
the deed of conditional sale. However, the latter refused
to vacate and surrender possession of the subject
property, prompting SSS to institute a complaint with the
Quezon City RTC on March 28, 1996 revoking the deed
of conditional sale and likewise praying for the issuance
of a writ of possession in its favor.
"During the pre-trial of the case, the court observed that
while the complaint was captioned 'Petition for Recovery

of Possession with [P]rayer for Issuance of a Writ of

Possession,' an examination of its body shows that the
prayer was actually for the rescission of the deed of
conditional sale. For this reason, the court ordered the
amendment of the complaint and in compliance thereto,
[petitioner] submitted its amended complaint on March
19, 1997.
"[Respondent] David denied the alleged violations of the
deed of conditional sale, stating that Buenaventura
Penus, alluded to by the [petitioner] as possessoroccupant of the subject property, was in fact a caretaker
until and after the necessary renovations and
modifications on the house were made.
"In a [D]ecision dated July 1, 1998, the court a quo
dismissed the complaint and adjudged the [petitioner]
liable for costs. The dispositive portion of the trial court's
decision reads:
'WHEREFORE, in the light of the foregoing, the
Amended Complaint is dismissed, with costs
against the plaintiff.
'SO ORDERED.'
"In dismissing the complaint, the court ruled that the
[petitioner] failed to prove that the [respondent]
purchased the subject property for the use and benefit of
another undisclosed party and not for his exclusive use,
or that the defendant sold, assigned, encumbered,
mortgaged, leased, subleased or in any manner altered
or disposed of the subject property or his rights thereto at
any other time. In arriving at its [D]ecision, the lower
court considered the testimony of the [respondent] that
when the subject property was delivered to him on
October 23, 1992, the unit was not habitable so he had to
make a few constructions thereon. He secured the
services of his cousin, Buenaventura Penus, to be the
caretaker while construction on the house was going on.
With this, the court concluded that possession, as a
condition of the deed of sale between the parties, was
sufficiently satisfied.
"Aggrieved, [Petitioner] SSS brought [an] appeal [to the
CA], arguing that the court a quo erred in holding that
[respondent] did not violate the terms and conditions of
the Deed of Conditional Sale and in consequently
dismissing the case."4
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that while other persons had
been found occupying the subject property, no proof was adduced
by petitioner to prove that they had taken possession of it on their
own behalf and not merely as respondent's caretakers. The
appellate court added that because of the squalid condition of the
property when it was delivered, respondent had to make
improvements thereon as well as ask Penus, and later on Oden
Domingo, to stay there as caretakers.
Through his caretakers, respondent was deemed to have occupied
and possessed the property as required by the Deed of Sale
between him and petitioner. The CA concluded that the property
had clearly been subject to respondent's will, a fact equivalent to
possession under Article 5315 of the Civil Code.
Hence, this Petition.6

Issues
In its Memorandum, petitioner raises this sole issue: "whether the
Court of Appeals committed reversible error in affirming the
Decision of the trial court holding that respondent did not violate
the terms and conditions of the Deed of Conditional Sale." 7
The Court's Ruling
The Petition is meritorious.
Sole Issue:
Violation of the Terms and Conditions
of the Deed of Conditional Sale
Petitioner avers that respondent violated the terms and conditions
of the Deed of Conditional Sale, when he failed to "actually occupy
and possess the property at all times" 8 and allowed other persons
to do so.9
It argues that contrary to the rulings of the trial and the appellate
courts, the Deed of Conditional Sale required "actual physical
possession at all times," not just simple possession. It contends
that the material occupation of the property by other persons ran
counter to the objective of the Social Security System (SSS)
housing program to restrict the use and enjoyment of the housing
units to SSS employees and their immediate families only.
Petitioner likewise submits that the appellate court erred in
believing the claim of respondent that the house was uninhabitable
when it was delivered to him in 1992. His claim was belied by his
acceptance of the property without protest, as well as by the fact
that his alleged caretakers had lived there from 1992 to 1996.
Petitioner adds that he should have used his available money to
improve the property, if the unit was indeed unlivable, instead of
fully settling in advance in December 1992 the unpaid balance of
its purchase price.
Propriety of Review
At the outset, the Court stresses that a question of law has arisen
from petitioner's contention that simple possession under Article
531 of the Civil Code is not the same as "actual occupancy and
possession at all times," as required of respondent under the
Deed. Such question -- of what law, rule or principle is to govern a
given state of facts -- is decidedly one of law. 10 It may be raised in
this appeal by certiorari under Rule 45 of the Rules of Court.
Rules of Contract Interpretation
Certain rules of contract interpretation come to mind at this point.
First, in construing a contract, it is a fundamental task to ascertain
the intention of the contracting parties. 11 As a rule, such intention is
determined by looking at the words used -- at all the words rather
than at a particular word or two; and at words in context rather
than just words standing alone.12
Indeed, under Article 1374 of the Civil Code, "the various
stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them
taken jointly." Second, the ascertained intention of the parties is
deemed an integral part of the contract, as though it has been
originally expressed in unequivocal terms.13 And third, the
reasonableness of the result obtained, after analysis and
construction of a contract, must also be carefully considered. 14

The conditions that were allegedly violated by respondent are

contained in paragraph 10 of the Deed of Conditional Sale, as
follows:
"10. The Contract shall further [provide] the following
terms and conditions:
(a) The VENDEE is making this purchase for
his/her own exclusive use and benefit and not
for the use and benefit of another undisclosed
party/parties;
(b) The purpose of the sale shall be to aid the
VENDEE in acquiring a house and lot for
himself/herself and/or his/her immediate family,
and not to provide him/her with a means for
speculation or profit by a future assignment of
his/her right herein acquired or the resale of the
PROPERTY subject of this Contract. Therefore,
the VENDEE, within the first FIVE (5) years of
the existence of this contract agrees not to sell,
assign, encumber, mortgage, lease, sub-let or
in any manner alter or dispose of the property
subject hereof, or his rights thereto, at any time,
in whole or in part. After the FIVE (5) year
period, VENDEE shall have the right to the full
disposal of the property, provided that,
VENDEE has been able to fully pay all of
his/her obligations herein. However, the
foregoing notwithstanding, the VENDEE may x
x x at any time with prior consent of the
VENDOR transfer his right to the PROPERTY
to any eligible employee of the VENDOR,
subject, however, to the right of first refusal by
the VENDOR who may refund to the VENDEE
all of his/her installment payments and the
value of substantial improvements introduced
by him/her if any, as appraised by the
VENDOR;
(c) The VENDEE, and his heirs and/or
successors, shall actually occupy and be in
possession of the PROPERTY at all times;
(d) The VENDEE shall not obstruct or interfere
in any manner whatsoever with the right of the
VENDOR or any of its duly authorized
representatives to inspect, survey, repair, lay
water pipes, gas, electric and telephone lines or
other works of similar purposes;

sanctions, when warranted, in the event x x x the

VENDEE has been found to have committed a
misrepresentation/falsification in his/her application for an
Employee Housing Loan."15
Actual Occupancy and
Possession at All Times
Plainly, the primary intention behind the above-quoted stipulations
is to restrict the sale, the use and the benefit of the housing units
to SSS employees and their immediate families only. This objective
is in line with that of the SSS housing loan program -- to aid its
employees in acquiring their own dwelling units at a low cost. 16
Such intent, draws life also from the social justice policy of RA
1161, as amended, otherwise known as the "Social Security
System Law" granting direct housing loans to covered employees
and giving priority to low-income groups.17
Indeed, the above goal is confirmed by the requirement that
respondent-vendee and his heirs or assigns must actually occupy
and possess the property at all times; by the proscription that he
must not sell, assign, encumber, mortgage, lease, sublet or in any
manner alter or dispose of the property for the first five (5) years;
and by the further proviso that he may alienate or transfer his
rights thereto at any time prior to full payment, but only to petitioner
under its right of first refusal or to any other eligible SSS employee.
These restrictive covenants are undeniably valid under Article
130618 of the Civil Code.
The use of the conjunctive and in subparagraph (c) is not by any
chance a surplusage. Neither is it meant to be without any legal
signification. Its use is confirmatory of the restrictive intent that the
houses provided by petitioner should be for the exclusive use and
benefit of the SSS employee-beneficiary.
It is easily discernible, therefore, that both "actual occupancy" and
"possession at all times" -- not just one or the other -- were
imposed as conditions upon respondent. The word and -- whether
it is used to connect words, phrases or full sentences -- must be
accepted in its common and usual meaning as "binding together
and as relating to one another." 19 And implies a conjunction,
joinder or union.20
Thus, respondent had to comply with not one, but two, concurring
conditions -- actual occupancy and possession at all times. The
question is, did he?
We rule that he did not.
No Actual Occupancy

(e) The VENDEE shall abide by and comply

with the Vendor's Occupancy Rules and
Regulations the terms and conditions of which
are made an integral part hereof by reference,
as well as that issued by any other
governmental authority which may, from time to
time, be promulgated in regard to the use and
preservation of the house and lot;
(f) The VENDEE warrants in full the truth of the
representation made in his/her Application For
EMPLOYEE HOUSING LOAN, the terms of
which are likewise made an integral part hereof
by reference.
"The violation of any of the conditions herein stipulated
shall be considered as a breach of this Contract, and
shall subject the VENDEE to the penalties provided for in
paragraphs (11) and (12) hereof, including administrative

First, actual possession is not the same as actual occupancy.

Hence, it was an error on the part of the lower courts to hold that
the requirement of possession alone was a sufficient compliance
with the conditions under subparagraphs (a) and (c).
Under the law,21 "[p]ossession is acquired by the material
occupation of a thing or the exercise of a right, or by the fact that it
is subject to the action of our will, or by the proper acts and legal
formalities established for acquiring such right." As such, actual
possession consists in the manifestation of acts of dominion over
property of such a nature as a party would naturally exercise over
his own22 -- as when respondent himself is physically in occupation
of the property, or even when another person who recognizes the
former's rights as owner is in occupancy.23 In short, possession
can be either "actual" or merely constructive.
On the other hand, actual occupancy connotes "something real, or
actually existing, as opposed to something merely possible, or to

something which is presumptive or constructive." 24

possession, it can only be actual or real, not constructive.

Unlike

Second, the uncontroverted fact remains that it was not

respondent and/or his immediate family, but Penus and his wife,
who had lived in the property since 1992; and that it was from
Penus that Domingo took over possession in 1996. Thus, while it
may be conceded that respondent "possessed" the property
through his caretakers, there is no escaping the fact that he and/or
his immediate family did not "actually occupy" it; and that he
allowed other persons to benefit from its use. In his letter to SSS
Assistant Administrator Amador Monteiro on January 24, 1996, 25
respondent admitted as much, but tried to justify his
noncompliance by saying that the property was not in a habitable
condition at the time of delivery. This line of defense was sustained
by the trial court on the ground of respondent's allegedly
"uncontroverted or unrebutted evidence."26
The RTC's finding, however, is neither borne out by the records
nor by substantial evidence. Hence, it constitutes an exception to
the rule that this Court cannot review factual findings.27
Indeed, a thorough review of the records reveals that the
averments of respondent were ably controverted by denials made
by petitioner. Negating his claim that the house was located
adjacent to a creek,28 it lengthily argued against it in the
Memorandum it submitted to the trial court. Likewise, it must be
stressed that under the Rules of Court, 29 the defense alleged in his
Answer is deemed controverted, whether or not petitioner filed a
reply.
Moreover, it is a basic rule of evidence that the party asserting an
affirmative allegation must prove it.30 However, all that there is to
back up the defense of respondent in this case is his self-serving
testimony and that of his witness, Domingo. As to the latter's
testimony, it suffices to say that he could not have affirmed the
alleged condition of the unit in 1992, as he took possession of it
only in 1996, four years after it had lain exposed to the elements
with no improvements whatsoever.
For four years, respondent likewise kept his silence about the
purported condition of the unit. He accepted it without any whimper
of protest on October 23, 1992, and even paid the housing loan in
full in December of the same year. If it was indeed uninhabitable,
he should have refused to accept it or immediately protested its
condition.
On the other hand, there is enough documentary evidence to
debunk his claim. The report of petitioner's Internal Audit Service 31
significantly established that 509 of the 728 awardees -presumably situated similarly as he was -- had occupied their units
in compliance with the assailed requirement. The Interview Slip32
submitted in evidence by petitioner also showed that Penus and
his wife, and later Domingo, had lived in the unit since 1992. In the
face of these facts, it is difficult to believe the defense of
respondent. For how could the units be habitable to many others,
but not to him?
Likewise, this Court takes judicial notice of the fact that low-cost
houses such as those offered by petitioner 33 are usually core or
shell units without adequate divisions, ceilings, cabinets, paint and,
in some cases, electrical connections -- features that have to be
installed, completed or refurbished by the awardees. The idea, of
course, is to provide immediate but affordable living spaces that
they can work at improving, according to their needs and finances
and while living therein. Certainly, at P172,978.85 (the cost of the
house and lot in this case), it is but fair to accept the lack of
amenities.

Neither can respondent assail the validity of the Contract as a onesided "take it or leave it" agreement. To begin with, a contract of
adhesion -- wherein one party imposes a ready-made form of
contract on the other -- is not strictly against the law.34 The terms of
the agreement cannot be modified, but can be freely rejected in its
entirety, by the other party. On the other hand, the latter's
adherence thereto would mean consent. 35 We need only to remind
respondent that contractual obligations between the parties have
the force of law and must be complied with in good faith.36
We therefore do not see any reason to discuss respondent's
added arguments, other than to say that the objectives of low-cost
housing -- mandated under the social justice provisions of the
Constitution37 -- are too important to be sidetracked by lame,
untimely and unfounded excuses. Such excuses do nothing but
harm to the salutary efforts of providing the underprivileged and
the homeless with cheap but decent houses. It is for this reason
that we regard this case as no ordinary skirmish over contractual
relations.
Rescission
In view of the foregoing discussion, we rule that rescission of the
Contract is the proper recourse. Article 1191 of the Civil Code
provides:
"Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
"The injured party may choose between fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission
even after he has chosen fulfillment, if the latter should
become impossible."
As noted in previous cases, the rescission contemplated under
Article 1191 is a principal action for "resolution," which is based on
a breach by a party of its reciprocal obligations. 38 The present
Contract is one of conditional sale -- oftentimes referred to as a
contract to sell, wherein ownership or title is retained by the
vendor39 until "full payment by the VENDEE of the full purchase
price of the PROPERTY, with all the interest due thereon, as well
as taxes and other charges AND upon their faithful compliance
with all the conditions of this Contract x x x."40
Although a transfer of ownership or title from the seller to the buyer
is normally predicated upon the payment of the purchase price, the
parties are nevertheless free to stipulate other lawful conditions by
which they bind themselves and upon which transfer of ownership
depends.41 In this case, that other obligation was faithful
compliance with the conditions of the Contract. Respondent did not
faithfully comply with the conditions under subparagraphs (10)(a)
and (c). His noncompliance also constituted a breach of his
reciprocal obligations under the Deed.
The Deed itself provides for its annulment and cancellation by
reason of a breach of the terms and conditions stipulated therein.
Paragraphs 11 and 12 provide thus:
"11. Should the VENDEE violate, refuse or fail to comply
with any of the terms and conditions stipulated herein, for
whatever reason, or is found to have committed any
misrepresentation in his/her application for EMPLOYEE
HOUSING LOAN, this Contract shall be deemed
annulled and cancelled without prejudice of the rights of
the parties under Republic Act No. 6652, otherwise
known as the Maceda Law, and shall entitle the
VENDOR to immediately repossess the property as if this

Contract was never made; for this purpose, the VENDEE

shall be considered and treated as a tenant holding the
property without the permission of the VENDOR, and
must peacefully vacate the premises immediately upon
repossession thereof by the VENDOR. The annulment
and cancellation of this Contract and the right of the
VENDOR to repossess the property shall become
effective upon mere written notice thereof to the
VENDEE.
"12. In addition to the consequences stated in the
immediately preceding paragraph, the VENDEE shall
forfeit in favor of the VENDOR all the installments made,
to stand as rent for his/her occupation of the property,
likewise subject to the provisions of Republic Act No.
6552."42 (Italics supplied)
However, this Court holds that the forfeiture provision under
paragraph 12 does not apply to the payment made by respondent.
The plain and simple reason is that he did not pay the purchase
price by installment, but instead paid it in full in December 1992 -two months after the delivery of the unit. Hence, that payment was
beyond the ambit of Republic Act 6552, otherwise known as the
Realty Installment Buyer Act or the Maceda Law.
Doctrinally, mutual restitution must follow rescission. Under Article
1385 of the Civil Code, "rescission creates the obligation to return
the things which were the object of the contract, together with their
fruits, and the price with its interests x x x." 43 Moreover, "[t]o
rescind is to declare a contract void at its inception and to put an
end to it as though it never was." 44 Hence, rescission restores the
parties to their relative positions, as if no contract has been made.
Paragraph 11, cited above, supports the mutual restitution required
in rescission.
Respondent is thus obliged to return the house and lot sold, as
well as rental payments he may have earned, if any. On the other
hand, petitioner is mandated to refund to him his full payment of
P172,978.85 plus legal interest of 6 percent per annum, as well as
the value of substantial improvements introduced by him, as
appraised by petitioner. Indeed, stipulated in the Deed is such
appraisal by the vendor,45 upon transfer of the property to
petitioner or to any of its eligible employees. This condition is
reasonably and justly applicable and proper in the present case.
WHEREFORE, this Petition is hereby GRANTED and the assailed
Decision SET ASIDE. The Deed of Conditional Sale is
CANCELLED. Petitioner is ORDERED to pay respondent
P172,978.85, plus the legal interest and the value of any
substantial improvements thereon. Respondent is ORDERED to
vacate immediately Block 18, Lot 8, SSS Housing, North Fairview,
Quezon City; and to surrender possession thereof to petitioner. No
costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9608

August 7, 1915

DIEGO LIAN, plaintiff-appellee,

vs.
MARCOS P. PUNO, ET AL., defendants-appellants.

Mariano Escueta for appellants.

S. Lopez for appellee.

From that decision the defendants appealed to this court and

made the following assignments of error:
I. The lower court erred in overruling the demurrer
filed by the appellants to the complaints.

JOHNSON, J.:
The facts upon which the decision in this case depends are as
follows:
(1) The the plaintiff, in the month of May, 1908, and for a long
time prior thereto, was the owner of a certain parcel of land
particularly described in paragraph 2 of the complaint.
(2) That on the 16th day of May, 1908, the plaintiff executed
the following document, which conferred upon the defendant
Marcos P. Puno the power, duties and obligations therein
contained:
I, Diego Lian, of age, married, a resident of Daet,
Province of Ambos Camarines, Philippine Islands,
and at the present time temporarily residing in this city
of Tarlac, capital of the Province of Tarlac, P.I., set
forth that I hereby confer sufficient power, such as the
law requires, upon Mr. Marcos P. Puno, likewise a
resident of this city of Tarlac, capital of the Province of
Tarlac, in order that in my name and representation
he may administer the interest I possess within this
municipality of Tarlac, purchase, sell, collect and pay,
as well as sue and be sued before any authority,
appear before the courts of justice and administrative
officers in any proceeding or business concerning the
good administration and advancement of my said
interests, and may, in necessary cases, appoint
attorneys at law or attorneys in fact to represent him.
The meaning, purport, and power conferred by this document
constitute the very gist of the present action.
(3) That in June, 1911, the defendant Puno, for the sum of
P800, sold and delivered said parcel of land to the other
defendants.
The plaintiff alleges that the said document (Exhibit A) did not
confer upon the defendant Puno the power to sell the land and
prayed that the sale be set aside; that the land be returned to
him, together with damages.
The defendants at first presented a demurrer to the complaint,
which was overruled. To the order overruling the demurrer the
defendants duly excepted. They later answered. In their
answer they first denied generally and specially all of the
important facts stated in the complaint. In their special answer
or defense they admitted the sale of the land by Puno to the
other defendants and alleged that the same was a valid sale
and prayed to be relieved from the liability under the complaint,
with their costs.
Upon the issue thus presented the lower court decided: (1)
That the document Exhibit A did not give Puno authority to sell
the land; (2) that the sale was illegal and void; (3) That
defendants should return to the land to the plaintiff; and (4)
That the defendants should pay to the plaintiff the sum of
P1,000 as damages, P400 of which the defendant Puno should
alone be responsible for, and to pay the costs.

II. The lower court erred in holding that the appellant

Marcos P. Puno was not authorized to sell the land in
question and that the sale executed by the said
Marcos P. Puno to the other appellants, Enrique,
Vicente, Aquilina and Remedios, surnamed
Maglanok, is null and void.
III. The lower court erred in ordering the appellee,
Diego Lian, to return to the appellants, Enrique,
Vicente, Aquilina, and Remedios Maglanok the sum of
P800, the selling price of the land question.
III. And, finally, the lower court erred in sentencing the
appellants to pay to the appellee the sum of P1,000,
the value of the products collected, and to pay the
costs.
IV. And, finally, the lower court erred in sentencing the
appellant to pay to the appellee the sum of P1,000,
the value of the products collected, and to pay the
costs.
With reference to the first assignment of error, we are of the
opinion that the facts stated in the opinion are sufficient to
constitute a cause of action.
With reference to the second assignment of error, the plaintiff
alleges that the power of attorney, as contained in Exhibit A,
did not authorize the defendant Puno had full and complete
power and authority to do what he did. The lower court held
that Exhibit A only gave Puno power and authority to
administer the land; that he was not authorized to sell it.
Omitting the purely explanatory parts of Exhibit A, it reads as
follows: "I, Diego Lian, ... set forth that I ... confer sufficient
power, such as the law requires, upon Mr. Marcos P. Puno ... in
order that in my name and representation he may administer ...
purchase, sell, collect and pay ... in any proceeding or
business
concerning
the
good
administration
and
advancement of my said interests, and may, in necessary
cases, appoint at law or attorneys in fact to represent him."
Contracts of agency as well as general powers of attorney
must be interpreted in accordance with the language used by
the parties. the real intention of the parties is primarily to be
determined from the language used. The intention is to be
gathered from the whole instrument. In case of doubt resort
must be had to the situation, surroundings and relations of the
parties. Whenever it is possible, effect is to be given to every
word and clause used by the parties. It is to be presumed that
the parties said what they intended to say and that they used
each word or clause with some purpose and that purpose is, if
possible, to be ascertained and enforced. The intention of the
parties must be sustained rather than defeated. If the contract
be open to two constructions, one of which would uphold while
the other would overthrow it, the former is to be chosen. So, if
by one construction the contract would be illegal, and by
another equally permissible construction it would be lawful, the
latter must be adopted. The acts of the parties in carrying out
the contract will be presumed to be done in good faith. The
acts of the parties will be presumed to have been done in

conformity with and not contrary to the intent of the contract.

The meaning of generals words must be construed with
reference to the specific object to be accomplished and limited
by the recitals made in reference to such object.
With these general observations in mind, ,let us examine the
terms of the power conferred upon the defendant Puno (Exhibit
A) and ascertain, if possible, what was the real intent of the
plaintiff. The lower court held that the "only power conferred
was the power to administer." Reading the contract we find it
says that the plaintiff "I confer ... power ... that ... he may
administer ... purchase, sell, collect and pay ... in any
proceeding or business concerning the good administration
and advancement of my said interests." The words "administer,
purchase, sell," etc., seem to be used coordinately. Each has
equal force with the other. There seems to be no good reason
for saying that Puno had authority to administer and not to sell
when "to sell" was as advantageous to the plaintiff in the
administration of his affairs as "to administer." To hold that the
power was "to administer" only when the power "to sell" was
equally conferred would be to give to special words of the
contract a special and limited meaning to the exclusion of other
general words of equal import.
The record contains no allegation on proof that Puno acted in
bad faith or fraudulently in selling the land. It will be presumed
that he acted in good faith and in accordance with his power as
he understood it. That his interpretation of his power, as
gathered from the contract (Exhibit A), is tenable cannot, we
believe, be successfully denied. In view of that fact and view of
the fact that, so far as the record shows, the other defendants
acted in good faith, we are of the opinion that the contract,
liberally construed, as we think it should be, justifies the
interpretation given it by Puno. In reaching this conclusion, we
have taken into account the fact that the plaintiff delayed his
action to annul said sale from the month of June, 1911, until
the 15th of February, 1913. Neither have we overlooked the
fact in the brief of the appellants that the plaintiff has not
returned, nor offered to return, nor indicated a willingness to
return, the purchase price. (Art. 1308 of the Civil Code; Manikis
vs. Blas, No. 7585.1).
In view of all the foregoing, we are of the opinion that the lower
court committed the error complained of in the second
assignment, and, without discussing the other assignments of
error, we are of the opinion, and so hold, that the judgment of
the lower court should be and is hereby revoked and that the
appellants should be relieved from all liability under the
complaint. Without any finding as to costs, it is so ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19012

October 30, 1967

VICTORIA JULIO, plaintiff-appellant,

vs.
EMILIANO DALANDAN and MARIA DALANDAN,
defendants-appellees.
Pedro Magsalin and O.M. Herrera for plaintiff-appellant.
Cornelio R. Magsarili for defendants-appellees.

SANCHEZ, J.:
Disputing the correctness of the lower court's order of April 29,
1961 dismissing the complaint, plaintiff elevated the case1 to
this Court on appeal.
Plaintiff's complaint which defendants, by a motion to
dismiss, successfully overturned in the court below is
planted upon a document Annex "A" of the complaint, labeled
in the national language "SALAYSAY" (Statement). It was in
the form of an affidavit subscribed and sworn to by one
Clemente Dalandan on September 8, 1950. By the terms of
this writing, Clemente Dalandan, deceased father of
defendants Emiliano and Maria Dalandan, acknowledged that
a four-hectare piece of riceland in Las acknowledged that a
four-hectare piece of riceland in Las Pias, Rizal belonging to
Victoriana Dalandan, whose only child and heir is plaintiff
Victoria Julio, was posted as security for an obligation which
he, Clemente Dalandan, assumed but, however, failed to fulfill.
The result was that Victoriana's said land was foreclosed. The
key provisions of said document are:2
3. Na ang lupang palayang ito na pagaari ni
VICTORIANA DALANDAN at sa kasalukuyan ay
walang ibang tagapagmana kung di si VICTORIA
JULIO, ay napafianza sa akin nuong bago pa
dumating ang huling digmaan at dahil sa hindi ako
nakatupad sa aking pananagutang na sasagutan ng
bukid niyang ito ay naembargo ang nasabi niyang
lupa;
[That this riceland owned by VICTORIANA
DALANDAN whose sole heir is VICTORIA JULIO was
posted as security for an obligation assumed by me
even before the outbreak of the last war and because
I failed to fulfill the obligation secured by her said farm
the same was foreclosed;]

4. Na dahil dito ay ako samakatuwid ay nanagot sa

kanya (VICTORIA JULIO), sa pagkakaembargo ng
lupa niyang iyong kung kaya't nagkasundo kami na
ako ay nanagot sa kanya sa pagkaembargong iyon at
ipinangako ko sa kanya na ang lupa niyang iyon na
naembargo ng dahil sa aking pananagutan ay aking
papalitan ng bukid din na may mahigit na APAT (4) na
hectarea (o humigit kumulang sa APAT NA KABANG
BINHI);
[That because of this, and as agreed upon between
us, I accordingly held myself liable to Victoria Julio for
the foreclosure of her said land, and I promised her
that I would replace her aforesaid land which was
foreclosed because of my obligation with another farm
of more than four; (4) hectares, that is, one planted to
four cavanes of seedlings, more or less;]
5. Na hindi maaring pilitin ang aking mga anak
(EMILIANO AT MARIA DALANDAN), na hingin ang
ani ng bukid na nabangit sa itaas ng salaysay na ito;
[That my children (EMILIANO AND MARIA
DALANDAN) may not be forced to give up the harvest
of the farm herein above mentioned;]
6. Na hindi rin maaring hingin kaaggad sa lalong
madaling panahon ang kapalit ng bukid na may apat
na kabang binhi;
[That neither may the land which was exchanged
for the farm with four cavanes of seedlings be
demanded immediately;]
Victoria Julio, in turn, joined Clemente Dalandan in the
execution of, and also swore to, the said document, in this
wise:
Na, ako VICTORIA JULIO, na binabanggit sa itaas
nito sa salaysay ni CLEMENTE DALANDAN, ay
nagpapatunay na tutoong lahat ang kanyang salaysay
na iyon at tinatanggap ko ang kanyang mga sinasabi.
[That I, VICTORIA JULIO, mentioned in the above
statement of CLEMENTE DALANDAN, attest to the
truth of, and accept, all that he stated therein.]
Back to the complaint herein. Plaintiff went on to aver that the
land of Clemente Dalandan set forth in the document, Annex
"A" of the complaint, referred to six small parcels described in
paragraph 4 thereof with a total area of barely two hectares
"the only land owned by Clemente Dalandan at the time of the
execution of the document" except fifty plots or "banigan"
(saltbeds), which were previously conveyed to plaintiff's mother
by mean of pacto de retro sale and title to which had already
been vested in the latter; that after the death of Clemente
Dalandan, plaintiff requested from defendants, Clemente's
legitimate and surviving heirs who succeeded in the
possession of the land thus conveyed, to deliver the same to
her; that defendants "insisted that according to the agreement",
neither delivery of the land nor the fruits thereof could
immediately be demanded, and that "plaintiff acceded to this
contention of defendants and allowed them to continue to
remain in possession" thereof; that demands have "been made
upon defendants to fix the period within which they would
deliver to the herein plaintiff the above-described parcels of

land but defendants have refused and until now still refuse to
fix a specific time within which they would deliver to plaintiff the
aforementioned parcels of land." Predicated upon the
foregoing allegations, plaintiff prayed for judgment against
defendants:
(a) Adjudging the herein plaintiff as owner of the land
described in paragraph 4 hereof;
(b) Fixing a time within which defendants should
deliver the said parcels of land to the herein plaintiff
as well as the fruits thereof;
(c) Adjudging that upon the expiration of the said time
defendants convey and deliver to the herein plaintiff
the said parcels of land as well as the fruits thereof;
(d) Ordering the defendants to pay the plaintiff the
sum of P2,000.00 as attorneys' fees;
(e) Ordering the defendants to pay the costs of the
suit; and granting such other relief and remedy as
may be just and equitable in the premises.
Defendants met the complaint with a motion to dismiss
grounded on: (1) prescription of plaintiff's action; (2) pendency
of another suit between the same parties for the same cause;
and (3) release and/or abandonment of the claim set forth in
plaintiff's complaint.
By its order of April 29, 1961, the lower court ruled that
plaintiff's suit, viewed either as an action for specific
performance or for the fixing of a term, had prescribed.
Reason: the 10-year period from the date of the document had
elapsed. The lower court found it unnecessary to pass upon
the other grounds for the motion to dismiss. Hence, this
appeal.
1. The threshold problem, basic to an understand of the issues
herein involved, is the meaning to be attached to the document
now under review. Undoubtedly, bad more felicitous terms
been employed, the intention of the parties could easily be
read. Unfortunately, ineptness of expression exacts of us an
examination of the document. Familiar rules of interpretation of
documents tell us that in ascertaining the intention of the
parties, the contents thereof should not be interpreted
piecemeal; all parts, provisions or terms are to be considered;
each paragraph clause or phrase must be read not in isolation,
but in the light of the entire writing; doubtful ones should be
given that sense which may result from all of them, considered
as a whole. Such construction will be adopted as will result
from an overall view of the document itself.
It is, in this perspective that we now look into the writing.
Adverting to paragraph 4 of the deed, defendants take the
position that the deceased Clemente Dalandan simply
"promised" to Victoria Julio a farm of about four hectares to
replace the land of Victoriana Dalandan (mother of Victoria
Julio) which was foreclosed. But this view loses sight of the
later provisions thereof. By paragraph 5, Clemente's children
may not be forced to give up the harvest of the farm mentioned
in the deed. This was followed by paragraph 6 which states
that Victoria Julio may not immediately demand the substitute
(kapalit) for the forfeited land. These last two statements in the
deed express the dominant purpose of the instrument. They
convey the idea that the naked ownership of the land in

substitution was, indeed, transferred to Victoria Julio. Else

there would have been no sense in the proviso that the fruits
as well as the physical possession of the land could not
immediately be demanded by Victoria Julio from Clemente's
children, the herein defendants. For, the right to demand fruits
and physical possession of property has been known to be
attributes of ownership.
The disputed complaint in paragraphs 6 and 7 thereof, in
essence, avers plaintiff's request for the delivery of the real
property; defendants' answer that "according to the agreement"
neither land nor fruits thereof could immediately be taken away
from them, and plaintiff's conformity thereto; and plaintiff's
demands that the period for delivery be fixed and defendants'
refusal.
The allegations of the complaint just noted carry us to another
aspect of the document: defendants' rights over the land vis-avis plaintiff's. What rights were transmitted to defendants by
their father, Clemente Dalandan? Paragraphs 6 and 7 of the
document supply the answer. They are usufructuaries for an
undetermined length of time. For so long as that period has not
been fixed and has not elapsed, they hold the property. Theirs
is to enjoy the fruits of the land and to hold the same as
trustees of Victoria Julio. And this because, by the deed,
Clemente Dalandan divested himself of the ownership
qualified solely by withholding enjoyment of the fruits and
physical possession. In consequence, Clemente Dalandan
cannot transmit to his heirs, the present defendants, such
ownership.3 Nemo dat quod non habet. And then, the
document is a declaration by Clemente Dalandan, now
deceased, against his own proprietary interests. Such
document is binding upon his heirs.4
2. But, defendants aver that recognition of the trust may not be
proved by evidence aliunde. They argue that by the express
terms of Article 1443 of the Civil Code, "[n]o express trusts
concerning an immovable or any interest therein may be
proved by parol evidence." This argument overlooks the fact
that no oral evidence is necessary. The express trust imposed
upon defendants by their predecessor appears in the
document itself. For, while it is true that said deed did not in
definitive words institute defendants as trustees, a duty is
therein imposed upon them when the proper time comes
to turn over both the fruits and the possession of the property
to Victoria Julio. Not that this view is without statutory support.
Article 1444 of the Civil Code states that: "No particular words
are required for the creation of an express trust, it being
sufficient that a trust is clearly intended." In reality, the
development of the trust as a method of disposition of property,
so jurisprudence teaches, "seems in large part due to its
freedom from formal requirements."5 This principle perhaps
accounts for the provisions in Article 1444 just quoted. For,
"technical or particular forms of words or phrases are not
essential to the manifestation of intention to create a trust or to
the establishment thereof."6 Nor would the use of some such
words as "trust" or "trustee" essential to the constitution of a
trust as we have held in Lorenzo vs. Posadas, 64 Phil. 353,
368. Conversely, the mere fact that the word "trust" or "trustee"
was employed would not necessarily prove an intention to
create a trust. What is important is whether the trustor
manifested an intention to create the kind of relationship which
in law is known as a trust. It is unimportant that the trustor
should know that the relationship "which he intends to create is
called a trust, and whether or not he knows the precise
characteristics of the relationship which is called a trust." 7
Here, that trust is effective as against defendants and in favor

of the beneficiary thereof, plaintiff Victoria Julio, who accepted

it in the document itself.8
3. Plaintiff is not to be handicapped by a lack of a clear
statement as to the actual description of the land referred to in
the trust deed, basis of plaintiff's cause of action. Obviously,
the document was not prepared by a learned scrivener. It
imperfectly speaks of a "farm of more than four (4) hectares."
But averment in the complaint is not lacking to clear the
uncertainty as to the identity of the land mentioned in that
document. Plaintiff points out in paragraph 4 of her complaint
that while said deed does not specifically define its boundaries
"the parties to the said document actually refer" to the land
which was "the only land owned by Clemente Dalandan at the
time of the execution" thereof, and which is set forth in small
parcels under said paragraph. This allegation in the complaint
does not add any new term or stipulation to the writing. Rather,
it explains an obscurity occasioned by lack of precision in a
clumsily prepared document. Thus it is, that authorities are not
wanting in support of the view that "in so far as the identity of
land involved" in a trust is concerned, "it has also been held
that the writings, in being considered for the purpose of
satisfying the statute of frauds, are to be considered in their
setting, and that parol evidence is admissible to make clear the
terms of a trust the existence of which is established by a
writing, . . ."9
4. This case having been brought before us on a motion to
dismiss, we need but stress that we are to be guided solely by
the averments of the complaint. So guided, we must say that
there is sufficient showing in the complaint that there is an
acknowledgment on the part of defendants that they hold the
property not as their own, but in trust. There is no statement in
the complaint intimating disavowal of such trust; the complaint
alleges refusal to deliver possession. In the sense in which we
understand the complaint to be, it cannot be said that plaintiff's
action to recover the property thus held in trust has prescribed.
Given the fiduciary relation which according to the complaint is
recognized by defendants, the latter may not invoke the statute
of limitations as a bar to plaintiff's action.10
5. Even on the assumption that defendants have not been
constituted as trustees under the document in question, still we
arrive at the same conclusion. For, plaintiff's action is aimed, by
an alleged owner of real property at recovery of possession
thereof, conditioned upon the fixing of the period therefor.
Since plaintiff claims ownership, possession, in the words of
this Court "is a mere consequence of ownership."11 It may not
be said that plaintiff's suit is barred by the statute of limitations.
She is protected by Article 1141 of the Civil Code, which reads:
"Real actions over immovables prescribe after thirty years." We
take this view for the obvious reason that defendants' motion to
dismiss on this score is directed at the prescription of plaintiff's
action not on acquisitive prescription.
6. Defendants in their brief draw attention, by way of counterassignment of error, to their claim that this case should also be
dismissed upon the ground that there exists another action
pending between the same parties for the same cause, and on
the further ground of release and/or abandonment.
The facts bearing on this issue are: In Land Registration Case
N-706, G.L.R.O. Record No. N-7014, Court of First Instance of
Rizal, defendants are applicants. That case so defendants
aver covers the very same land set forth in plaintiff's
complaint. In their opposition to that application, herein plaintiff
prayed that the same land the subject of this suit

(covered by Plan PSU 129514) be registered "in the names of

the herein applicants and oppositor with the specific mention
therein that the herein oppositor owns fifty salt beds therein
and having an absolute right to the use of the depositories."
Defendants argue that if plaintiff was the real owner of the
entire area, opposition should have been presented on the
whole, not merely as to fifty salt beds.
Parenthetically, the question of ownership over the portion of
fifty salt beds had already been resolved by this Court in a
decision promulgated on February 29, 1964 in L-19101
(Emiliano Dalandan and Maria Dalandan, plaintiffs, vs. Victoria
Julio, et al., defendants). There, this Court affirmed the order
dismissing the complaint filed by defendants herein, plaintiffs
therein, for the repurchase of fifty salt beds which were the
subject of a sale with pacto de retro executed on September
24, 1932 by Clemente Dalandan in favor of Victoriana
Dalandan, predecessor of plaintiff.
There is no point in the argument that an action is pending
between plaintiff and defendants. Because, with the exception
of the fifty salt beds which according to the complaint is not
included in the deed plaintiff filed no opposition to
defendants' application for land registration. Failure to so
object in reference to the registration of a bigger portion of the
land, simply means that there is no case between the parties in
reference thereto in the land registration proceeding.
Not that plaintiff released or abandoned the claim to that bigger
portion. For, there is an averment in the complaint that an
agreement exists between plaintiff and defendants to defer
delivery thereof; and that defendants thereafter refused to fix
the period for such delivery. So that, on the assumption that
defendants should succeed in obtaining title to the property in
the land registration case, such would not bar Victoria Julio
from requiring them to execute a conveyance of the property in
her favor, in the event she (plaintiff herein) prevails in the
present case. And this, because defendants could here be
declared as mere trustees of plaintiff, if the averments of the
complaint are found to be true."12
For the reasons given, the order of the Court of First Instance
of Rizal dated April 29, 1961 dismissing the complaint is
hereby reversed and set aside, with instructions to remand the
case to the court below for further proceedings.
Costs against defendants-appellees. So ordered.

Corporation, Plaintiff-Appellee vs. The Philippine American

Insurance Company, Inc. Defendant-Appellant, which reversed
the decision of the Court of First Instance of Manila in Civil
Case No. 70811 entitled "National Power Corporation v. Far
Eastern Electric, Inc., et al." and (b) respondent's Court's
resolution dated April 19, 1976 denying petitioner National
Power Corporation's Motion for Reconsideration (Petition, p.
13, Rollo).
The undisputed facts of this case are as follows:
The National Power Corporation (NPC) entered into a contract
with the Far Eastern Electric, Inc. (FFEI) on December 26,
1962 for the erection of the Angat Balintawak 115-KW-3-Phase
transmission lines for the Angat Hydroelectric Project. FEEI
agreed to complete the work within 120 days from the signing
of the contract, otherwise it would pay NPC P200.00 per
calendar day as liquidated damages, while NPC agreed to pay
the sum of P97,829.00 as consideration. On the other hand,
Philippine American General Insurance Co., Inc. (Philamgen)
issued a surety bond in the amount of P30,672.00 for the
faithful performance of the undertaking by FEEI, as required.
The condition of the bond reads:
The liability of the PHILIPPINE AMERICAN
GENERAL INSURANCE COMPANY, INC. under this
bond will expire One (1) year from final Completion
and Acceptance and said bond will be cancelled 30
days after its expiration, unless surety is notified of
any existing obligation thereunder. (Exhibit 1-a)
in correlation with the provisions of the construction contract
between Petitioner and Far Eastern Electric, Inc. particularly
the following provisions of the Specifications. to wit:
1. Par. 1B-2l Release of Bond
1B-21 Release of Bond
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-43706 November 14, 1986
NATIONAL POWER CORPORATION, petitioner,
vs.
COURT OF APPEALS and PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., respondents.
Conrado Q. Crucillo for petitioner.
Gregorio D. David for private respondent.

PARAS, J.:
This is a petition for review on certiorari seeking to set aside:
(a) the judgment of respondent Court of Appeals dated March
25, 1976 in CA-G.R. No. 50112-R, entitled National Power

The Contractor's performance bond will be released

by the National Power Corporation at the expiration of
one (1) year from the completion and final acceptance
of the work, pursuant to the provisions of Act No.
3959, and subject to the General Conditions of this
contract. (Page 49, Printed Record on Appeal); and
2. GP-19 of Specifications, which reads:
(a) Should the Contractor fail to complete the
construction of the work as herein specified and
agreed upon, or if the work is abandoned, ... the
Corporation shall have the power to take over the
work by giving notice in writing to that effect to the
Contractor and his sureties of its intention to take over
the construction work.
(b) ... It is expressly agreed that in the event the
corporation takes over the work from the Contractor,
the latter and his bondsmen shall continue to be liable
under this contract for any expense in the completion
of the work in excess of the contract price and the
bond filed by the Contractor shall be answerable for
the same and for any and all damages that the

Corporation may suffer as a result thereof. (pp. 76-78,

Printed Record on Appeal)
FEEI started construction on December 26, 1962 but on May
30, 1963, both FEEI and Philamgen wrote NPC requesting the
assistance of the latter to complete the project due to
unavailability of the equipment of FEEI. The work was
abandoned on June 26, 1963, leaving the construction
unfinished. On July 19, 1963, in a joint letter, Philamgen and
FEEI informed NPC that FEEI was giving up the construction
due to financial difficulties. On the same date, NPC wrote
Philamgen informing it of the withdrawal of FEEI from the work
and formally holding both FEEI and Philamgen liable for the
cost of the work to be completed as of July 20, 1962 plus
damages.
The work was completed by NPC on September 30, 1963. On
January 30, 1967 NPC notified Philamgen that FEEI had an
outstanding obligation in the amount of P75,019.85, exclusive
of interest and damages, and demanded the remittance of the
amount of the surety bond the answer for the cost of
completion of the work. In reply, Philamgen requested for a
detailed statement of account, but after receipt of the same,
Philamgen did not pay as demanded but contended instead
that its liability under the bond has expired on September 20,
1964 and claimed that no notice of any obligation of the surety
was made within 30 days after its expiration. (Record on
Appeal, pp. 191-194; Rollo, pp. 62-64).
NPC filed Civil Case No. 70811 for collection of the amount of
P75,019.89 spent to complete the work abandoned;
P144,000.00 as liquidated damages and P20,000.00 as
attorney's fees. Only Philamgen answered while FEEI was
declared in default.
The trial court rendered judgment in favor of NPC, the
dispositive portion of which reads:
WHEREFORE, the defendant Far Eastern Electric,
Inc., is ordered to pay the plaintiff the sum of
P75,019.86 plus interest at the legal rate from
September 21, 1967 until fully paid. Out of said
amount, both defendants, Far Eastern Electric, Inc.,
and the Philippine American Insurance Company,
Inc., are ordered to pay, jointly and severally, the
amount of P30,672.00 covered by Surety Bond No.
26268, dated December 26, 1962, plus interest at the
legal rate from September 21, 1967 until fully paid,
Both defendants are also ordered to pay plaintiff the
sum of P3,000.00 as attorney's fees and costs.
On appeal by Philamgen, the Court of Appeals reversed the
lower court's decision and dismissed the complaint.
Hence this petition.
Respondent Philamgen filed its comment on the petition on
August 6, 1978 (Rollo, p. 62) in compliance with the resolution
dated June 16, 1976 of the First Division of this Court (Rollo, p.
52) while petitioner NPC filed its Reply to the comment of
respondent (Rollo, p. 76) as required in the resolution of this
Court of August 16, 1976, (Rollo, p. 70). In the resolution of
September 20, 1976, the petition for certiorari was given due
course (Rollo, p. 85). Petitioner's brief was filed on November
27, 1976 (Rollo, p. 97) while Philamgen failed to file brief within

the required period and this case was submitted for decision
without respondent's brief in the resolution of this Court of
February 25. 1977) Rollo, p. 103).
In its brief, petitioner raised the following assignment of errors:
I
RESPONDENT COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER SHOULD HAVE
GIVEN NOTICE TO PRIVATE RESPONDENT
PHILAMGEN OF ANY EXISTING OBLIGATION
WITHIN 30 DAYS FROM EXPIRATION OF THE
BOND TO HOLD SAID SURETY LIABLE
THEREUNDER, DESPITE PETITIONER'S TAKING
OVER OF THE WORK ABANDONED BY THE
CONTRACTOR BEFORE ITS COMPLETION.
II
ASSUMING ARGUENDO THAT PETITIONER
SHOULD STILL NOTIFY PRIVATE RESPONDENT
PHILAMGEN OF ANY EXISTING OBLIGATION
UNDER THE BOND DESPITE THE TAKE-OVER OF
WORK BY PETITIONER, RESPONDENT COURT OF
APPEALS NONETHELESS ERRED IN HOLDING
THAT PETITIONER'S LETTER DATED JULY 19,
1963 (EXH. E) TO PRIVATE RESPONDENT WAS
NOT SUFFICIENT COMPLIANCE WITH THE
CONDITION OF THE BOND.
III
RESPONDENT COURT OF APPEALS ERRED IN
ABSOLVING PRIVATE RESPONDENT PHILAMGEN
FROM ITS LIABILITY UNDER THE BOND.
The decisive issue in this case is the correct interpretation
and/or application of the condition of the bond relative to its
expiration, in correlation with the provisions of the construction
contract, the faithful performance of which, said bond was
issued to secure.
The bone of contention in this case is the compliance with the
notice requirement as a condition in order to hold the surety
liable under the bond.
Petitioner claims that it has already complied with such
requirement by virtue of its notice dated July 19, 1963 of
abandonment of work by FEEI and of its takeover to finish the
construction, at the same time formally holding both FEEI and
Philamgen liable for the uncompleted work and damages. It
further argued that the notice required in the bond within 30
days after its expiration of any existing obligation, is applicable
only in case the contractor itself had completed the contract
and not when the contractor failed to complete the work, from
which arises the continued liability of the surety under its bond
as expressly provided for in the contract. Petitioner's
contention was sustained by the trial court.
On the other hand, private respondent insists that petitioner's
notice dated July 19, 1983 is not sufficient despite previous
events that it had knowledge of FEEI's failure to comply with
the contract and claims that it cannot be held liable under the
bond without notice within thirty days from the expiration of the

bond, that there is a subsisting obligation. Private respondent's

contention is sustained by the Court of Appeals.
The petition is impressed with merit.
As correctly assessed by the trial court, the evidence on record
shows that as early as May 30, 1963, Philamgen was duly
informed of the failure of its principal to comply with its
undertaking. In fact, said notice of failure was also signed by its
Assistant Vice President. On July 19, 1963, when FEEI
informed NPC that it was abandoning the construction job, the
latter forthwith informed Philamgen of the fact on the same
date. Moreover, on August 1, 1963, the fact that Philamgen
was seasonably notified, was even bolstered by its request
from NPC for information of the percentage completed by the
bond principal prior to the relinquishment of the job to the latter
and the reason for said relinquishment. (Record on Appeal, pp.
193-195). The 30-day notice adverted to in the surety bond
applies to the completion of the work by the contractor. This
completion by the contractor never materialized.

Nielson & Co., Inc. v. Lepanto Consolidated Mining Co. (1968,

Zaldivar)

Parties:
plaintiff-appelant: Nielson & Co
defendant-appelle: Lepanto Consolidated Mining Co.

Facts:

The surety bond must be read in its entirety and together with
the contract between NPC and the contractors. The provisions
must be construed together to arrive at their true meaning.
Certain stipulations cannot be segregated and then made to
control.
Furthermore, it is well settled that contracts of insurance are to
be construed liberally in favor of the insured and strictly against
the insurer. Thus ambiguity in the words of an insurance
contract should be interpreted in favor of its beneficiary.
(Serrano v. Court of Appeals, 130 SCRA 327, July 16, 1984).
In the case at bar, it cannot be denied that the breach of
contract in this case, that is, the abandonment of the
unfinished work of the transmission line of the petitioner by the
contractor Far Eastern Electric, Inc. was within the effective
date of the contract and the surety bond. Such abandonment
gave rise to the continuing liability of the bond as provided for
in the contract which is deemed incorporated in the surety
bond executed for its completion. To rule therefore that private
respondent was not properly notified would be gross error.
PREMISES CONSIDERED, the decision dated March 25,
1976 and the resolution dated April 19, 1976 of the Court of
Appeals are hereby SET ASIDE, and a new one is hereby
rendered reinstating the decision of the Court of First Instance
of Manila in Civil Case No. 70811 entitled "National Power
Corporation v. Far Eastern Electric, Inc., et al."

An operating agreement was executed before World War II (on 30

January 1937) between Nielson & Co. Inc. and the Lepanto
Consolidated Mining Co. whereby the former operated and
managed the mining properties owned by the latter for a
management fee of P2,500.00 a month and a 10% participation in
the net profits resulting from the operation of the mining
properties, for a period of 5 years.

In the latter part of 1941, the parties agreed to renew the contract
for another period of 5 years, but in the mean time, the Pacific
War broke out in December 1941.

In January 1942 operation of the mining properties was disrupted

on account of the war. The mill, power plant, supplies on hand,
equipment, concentrates on hand and mines, were destroyed.
The Japanese forces thereafter occupied the mining properties,
operated the mines during the continuance of the war.

After the mining properties were liberated from the Japanese

forces, LEPANTO took possession thereof and embarked in
rebuilding and reconstructing the mines and mill. On 26 June
1948 the mines resumed operation under the exclusive
management of LEPANTO.

Shortly after the mines were liberated from the Japanese invaders
in 1945, a disagreement arose between NIELSON and LEPANTO
over the status of the operating contract which as renewed
expired in 1947. Under the terms thereof, the management
contract shall remain in suspense in case fortuitous event or force
majeure, such as war or civil commotion, adversely affects the
work of mining and milling.

On 6 February 1958, NIELSON brought an action against

LEPANTO to recover certain sums of money representing
damages allegedly suffered by the former in view of the refusal of
the latter to comply with the terms of a management contract.

The Trial Court dismissed the complaint.

The Supreme Court reversed the decision. It held that the war
suspended the contract by virtue of the force majeure clause. And
that the intention of the parties regarding the meaning and usage
concerning the force majeure clause meant the extension of the
same for a period equivalent to the suspension.

In this motion for reconsideration, LEPANTO advances a new

theory. It now asserts that the management contract in question is
a contract of agency such that it has the right to revoke and
terminate the said contract, as it did terminate the same, under
the law of agency, and particularly pursuant to Article 1733 of the
Old Civil Code (Article 1920 of the New Civil Code).

SO ORDERED.

Issue:

Whether or not the management agreement has been extended as a

result of the supervening war

Held:
The pertinent portion of the management contract (Exh. C) which
refers to suspension should any event constituting force majeure
happen appears in Clause II thereof which we quote hereunder:
In the event of inundations, floodings of the mine, typhoon,
earthquake or any other force majeure, war, insurrection,
civil commotion, organized strike, riot, injury to the
machinery or other event or cause reasonably beyond the
control of NIELSON and which adversely affects the work of
mining and milling; NIELSON shall report such fact to
LEPANTO and without liability or breach of the terms of this
Agreement, the same shall remain in suspense, wholly or
partially during the terms of such inability.
A careful scrutiny of the clause above-quoted will at once reveal that in
order that the management contract may be deemed suspended two
events must take place which must be brought in a satisfactory manner
to the attention of defendant within a reasonable time, to wit: (1) the
event constituting the force majeure must be reasonably beyond the
control of Nielson, and (2) it must adversely affect the work of mining
and milling the company is called upon to undertake. As long as these
two condition exist the agreement is deem suspended.
Does the evidence on record show that these two conditions had
existed which may justify the conclusion that the management
agreement had been suspended in the sense entertained by
appellant? Let us go to the evidence.
It is a matter that this Court can take judicial notice of that war
supervened in our country and that the mines in the Philippines were
either destroyed or taken over by the occupation forces with a view to
their operation. The Lepanto mines were no exception for not was the
mine itself destroyed but the mill, power plant, supplies on hand,
equipment and the like that were being used there were destroyed as
well. Thus, the following is what appears in the Lepanto Company
Mining Report dated March 13, 1946 submitted by its President C. A.
DeWitt to the defendant:1 "In February of 1942, our mill, power plant,
supplies on hand, equipment, concentrates on hand, and mine, were
destroyed upon orders of the U.S. Army to prevent their utilization by
the enemy." The report also mentions the report submitted by Mr.
Blessing, an official of Nielson, that "the original mill was destroyed in
1942" and "the original power plant and all the installed equipment
were destroyed in 1942." It is then undeniable that beginning February,
1942 the operation of the Lepanto mines stopped or became
suspended as a result of the destruction of the mill, power plant and
other important equipment necessary for such operation in view of a
cause which was clearly beyond the control of Nielson and that as a
consequence such destruction adversely affected the work of mining
and milling which the latter was called upon to undertake under the
management contract. Consequently, by virtue of the very terms of
said contract the same may be deemed suspended from February,
1942 and as of that month the contract still had 60 months to go.
On the other hand, the record shows that the defendant admitted that
the occupation forces operated its mining properties subject of the
management contract,2 and from the very report submitted by
President DeWitt it appears that the date of the liberation of the mine
was August 1, 1945 although at the time there were still many booby
traps.3 Similarly, in a report submitted by the defendant to its
stockholders dated August 25, 1948, the following appears: "Your
Directors take pleasure in reporting that June 26, 1948 marked the
official return to operations of this Company of its properties in
Mankayan, Mountain Province, Philippines."4
It is, therefore, clear from the foregoing that the Lepanto mines were
liberated on August 1, 1945, but because of the period of rehabilitation
and reconstruction that had to be made as a result of the destruction of
the mill, power plant and other necessary equipment for its operation it
cannot be said that the suspension of the contract ended on that date.
Hence, the contract must still be deemed suspended during the
succeeding years of reconstruction and rehabilitation, and this period
can only be said to have ended on June 26, 1948 when, as reported by
the defendant, the company officially resumed the mining operations of

the Lepanto. It should here be stated that this period of suspension

from February, 1942 to June 26, 1948 is the one urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the
part of Nielson had been suspended during the period set out above
within the purview of the management contract, the next question that
needs to be determined is the effect of such suspension. Stated in
another way, the question now to be determined is whether such
suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we
again need to resort to the evidence.
For appellant Nielson two witnesses testified, declaring that the
suspension had the effect of extending the period of the contract,
namely, George T. Scholey and Mark Nestle. Scholey was a mining
engineer since 1929, an incorporator, general manager and director of
Nielson and Company; and for some time he was also the vicepresident and director of the Lepanto Company during the pre-war
days and, as such, he was an officer of both appellant and appellee
companies. As vice-president of Lepanto and general manager of
Nielson, Scholey participated in the negotiation of the management
contract to the extent that he initialed the same both as witness and as
an officer of both corporations. This witness testified in this case to the
effect that the standard force majeure clause embodied in the
management contract was taken from similar mining contracts
regarding mining operations and the understanding regarding the
nature and effect of said clause was that when there is suspension of
the operation that suspension meant the extension of the contract.
Thus, to the question, "Before the war, what was the understanding of
the people in the particular trend of business with respect to the force
majeure clause?", Scholey answered: "That was our understanding
that the suspension meant the extension of time lost."6
Mark Nestle, the other witness, testified along similar line. He had been
connected with Nielson since 1937 until the time he took the witness
stand and had been a director, manager, and president of the same
company. When he was propounded the question: "Do you know what
was the custom or usage at that time in connection with force majeure
clause?", Nestle answered, "In the mining world the force majeure
clause is generally considered. When a calamity comes up and stops
the work like in war, flood, inundation or fire, etc., the work is
suspended for the duration of the calamity, and the period of the
contract is extended after the calamity is over to enable the person to
do the big work or recover his money which he has invested, or
accomplish what his obligation is to a third person ."7
And the above testimonial evidence finds support in the very minutes
of the special meeting of the Board of Directors of the Lepanto
Company issued on March 10, 1945 which was then chairmaned by
Atty. C. A. DeWitt. We read the following from said report:
The Chairman also stated that the contract with Nielson and
Company would soon expire if the obligations were not
suspended, in which case we should have to pay them the
retaining fee of P2,500.00 a month. He believes however,
that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it
were not there, the law itself would suspend the operations
of the contract on account of the war. Anyhow, he stated, we
shall have no difficulty in solving satisfactorily any problem
we may have with Nielson and Company.8
Thus, we can see from the above that even in the opinion of Mr. DeWitt
himself, who at the time was the chairman of the Board of Directors of
the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he
expressed the belief that the period was extended because of the
provision contained therein suspending the effects thereof should any
of the case of force majeure happen like in the present case, and that
even if such provision did not exist the law would have the effect of
suspending it on account of the war. In substance, Atty. DeWitt
expressed the opinion that as a result of the suspension of the mining
operation because of the effects of the war the period of the contract
had been extended.
Contrary to what appellant's evidence reflects insofar as the
interpretation of the force majeure clause is concerned, however,
appellee gives Us an opposite interpretation invoking in support thereof
not only a letter Atty. DeWitt sent to Nielson on October 20, 1945, 9
wherein he expressed for the first time an opinion contrary to what he

reported to the Board of Directors of Lepanto Company as stated in the

portion of the minutes of its Board of Directors as quoted above, but
also the ruling laid down by our Supreme Court in some cases decided
sometime ago, to the effect that the war does not have the effect of
extending the term of a contract that the parties may enter into
regarding a particular transaction, citing in this connection the cases of
Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil.
150; and Lo Ching y So Young Chong Co. v. Court of Appeals, et al.,
81 Phil. 601.
To bolster up its theory, appellee also contends that the evidence
regarding the alleged custom or usage in mining contract that
appellant's witnesses tried to introduce was incompetent because (a)
said custom was not specifically pleaded; (b) Lepanto made timely and
repeated objections to the introduction of said evidence; (c) Nielson
failed to show the essential elements of usage which must be shown to
exist before any proof thereof can be given to affect the contract; and
(d) the testimony of its witnesses cannot prevail over the very terms of
the management contract which, as a rule, is supposed to contain all
the terms and conditions by which the parties intended to be bound.
It is here necessary to analyze the contradictory evidence which the
parties have presented regarding the interpretation of the force
majeure clause in the management contract.
At the outset, it should be stated that, as a rule, in the construction and
interpretation of a document the intention of the parties must be sought
(Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to
the ascertainment of the meaning intended by the parties. And once
this intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in
unequivocal terms (Shoreline Oil Corp. v. Guy, App. 189, So., 348,
cited in 17A C.J.S., p. 47). How is this intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts
of the contracting parties in relation to the transaction under
consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting
of the Board of Directors of Lepanto in the portion of the minutes
already quoted above wherein, as already stated, he expressed the
opinion that the life of the contract, if not extended, would last only until
January, 1947 and yet he said that there is a provision in the contract
that the war had the effect of suspending the agreement and that the
effect of that suspension was that the agreement would have to
continue with the result that Lepanto would have to pay the monthly
retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm
that he went to the extent that even if there was no provision for
suspension in the agreement the law itself would suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20,
1945 wherein apparently he changed his mind because there he stated
that the contract was merely suspended, but not extended, by reason
of the war, contrary to the opinion he expressed in the meeting of the
Board of Directors already adverted to, but between the two opinions
of Atty. DeWitt We are inclined to give more weight and validity to the
former not only because such was given by him against his own
interest but also because it was given before the Board of Directors of
Lepanto and in the presence, of some Nielson officials 10 who, on that
occasion were naturally led to believe that that was the true meaning of
the suspension clause, while the second opinion was merely selfserving and was given as a mere afterthought.
Appellee also claims that the issue of true intent of the parties was not
brought out in the complaint, but anent this matter suffice it to state that
in paragraph No. 19 of the complaint appellant pleaded that the
contract was extended. 11 This is a sufficient allegation considering that
the rules on pleadings must as a rule be liberally construed.
It is likewise noteworthy that in this issue of the intention of the parties
regarding the meaning and usage concerning the force majeure
clause, the testimony adduced by appellant is uncontradicted. If such
were not true, appellee should have at least attempted to offer
contradictory evidence. This it did not do. Not even Lepanto's
President, Mr. V. E. Lednicky who took the witness stand, contradicted
said evidence.
In holding that the suspension of the agreement meant the extension
of the same for a period equivalent to the suspension, We do not have

the least intention of overruling the cases cited by appellee. We simply

want to say that the ruling laid down in said cases does not apply here
because the material facts involved therein are not the same as those
obtaining in the present. The rule of stare decisis cannot be invoked
where there is no analogy between the material facts of the decision
relied upon and those of the instant case.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 151217

September 8, 2006

SPOUSES CESAR R. ROMULO and NENITA S. ROMULO,

petitioners,
vs.
SPOUSES MOISES P. LAYUG, JR., and FELISARIN LAYUG,
respondents.
DECISION
TINGA, J.:
This is an appeal by certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, assailing the Court of Appeals Decision 1 and
Resolution2 in CA-G.R. CV No. 63965. Said Decision reversed and
set aside the Decision3 of the Regional Trial Court (RTC), Branch
258, Paraaque City, which nullified the Deed of Absolute Sale and
Contract of Lease executed between herein petitioners and
respondents.
The following factual antecedents are matters of record.
On April 11, 1996, petitioners Spouses Cesar and Nenita Romulo
filed a verified Complaint for Cancellation of Title, Annulment of
Deed of Absolute Sale and Contract of Lease with Damages
against respondents Spouses Moises and Felisarin Layug. The
complaint was docketed as Civil Case No. 96-0172 and raffled to
Branch 258 of the RTC of Paraaque.4
Petitioners averred in their complaint that sometime in 1986, they
obtained from respondents a loan in the amount of P50,000.00
with a monthly interest of 10%, which subsequently ballooned to
P580,292.00. To secure the payment of the loan, respondents
allegedly duped petitioners into signing a Contract of Lease and a
Deed of Absolute Sale covering petitioners house and lot located
at Phase II, BF Homes, Sucat, Paraaque and covered by
Transfer Certificate of Title (TCT) No. S-71528. The Deed of
Absolute Sale purportedly facilitated the cancellation of petitioners
title on the house and lot and the issuance of TCT No. 20489 in the
name of respondents. Thus, petitioners prayed for the nullification
of the Deed of Absolute Sale, the contract of lease and TCT No.
20489, and the award of moral and exemplary damages.5
Respondents denied petitioners allegations. In their Answer,6 they
vouched for the validity of the Deed of Absolute Sale, particularly
as having been voluntarily executed by the parties for the purpose
of extinguishing petitioners indebtedness to respondents. As
consideration of the sale, respondents allegedly paid the amount
of P200,000.00 in addition to the writing off of petitioners
obligation to them. That they allowed petitioners to occupy the
house and lot as lessees thereof was founded on the trust they
reposed on petitioners, claimed respondents.7
Prior to the filing of Civil Case No. 96-0172, respondent Moises
Layug, Jr. ("Moises") filed Civil Case No. 9422, an action for
ejectment, against petitioners to compel the latter to vacate the
house and lot allegedly sold by petitioners to Moises and
subsequently rented out by him to petitioners. Moises alleged that
petitioners violated the terms of the Contract of Lease when the
latter failed to pay any rental or exercise their option to repurchase

the house and lot and refused to vacate the property despite
demand. The Metropolitan Trial Court (MeTC), Branch 77,
Paraaque dismissed the complaint for lack of cause of action. 8
The RTC, Branch 257, Paraaque, likewise dismissed Moises
appeal based on its finding that the parties did not intend to enter
into a lease agreement.9 The Court of Appeals denied Moises
petition for review on the ground of late filing. 10 Upon elevation to
this Court, Moises petition for review on certiorari was denied with
finality by this Court.11
On June 21, 1999, the trial court rendered judgment in favor of
petitioners in Civil Case No. 96-0172. The dispositive portion of the
decision reads:
WHEREFORE, the plaintiffs having been able to prove
their claim by preponderance of evidence, judgment is
hereby rendered in their favor and against spouses
Moises P. Layug and Felisarin Layug whereby the
Contract of Lease as well as the Deed of Sale allegedly
executed by the herein parties are hereby declared NULL
and VOID and of no force and effect and the Register of
Deeds of the City of Paraaque is hereby ordered to
cancel Transfer Certificate of Title No. 20489 registered
in the names of MOISES P. LAYUG married to
FELISARIN LAYUG and to issue a new one in the name
of Spouses Cesar R. Romulo and Nenita S. Romulo,
upon the payment of the required fees by the plaintiffs.
Likewise, defendants Spouses Moises P. Layug and
Felisarin Layug are hereby ordered to pay jointly and
severally Spouses Cesar R. Romulo and Nenita S.
Romulo the following, to wit:
1. The amount of P100,000.00 as and by way
of moral damages;
2. The amount of P80,000.00 as exemplary
damages;
3. The amount of P50,000.00 as and by way of
attorneys fees; and
4. The costs of suit.
SO ORDERED.12
Respondents elevated the matter to the Court of Appeals,
questioning, among others, the trial courts finding that the contract
between petitioners and respondents was an equitable mortgage. 13
The Court of Appeals reversed and set aside the RTC Decision,
mainly on the ground that petitioners failed to present sufficient
evidence to prove their allegation that their signatures to the Deed
of Absolute Sale were obtained fraudulently. Their motion for
reconsideration rebuffed,14 petitioners filed the instant petition
raising the lone issue of whether or not the transaction between
the parties constitutes an equitable mortgage.
On this issue, the RTC and the Court of Appeals differ in opinion.
The trial court based its declaration that an equitable mortgage
was intended by the parties on the finding that petitioners
remained in possession of the house and lot even after the
property was supposedly sold to respondents. The trial court also
gave evidentiary weight to the decisions of the MeTC and RTC
dismissing the action for ejectment in Civil Case No. 9422, where
both courts found that petitioners neither vacated the property nor
paid any rental even after the execution of the Deed of Absolute
Sale. The Court of Appeals disagreed and declared that an
absolute sale was contemplated by the parties based on the
express stipulations in the Deed of Absolute Sale and on the acts
of ownership by respondents subsequent to its execution.
Whether or not the parties intended an equitable
factual issue. As a general rule, factual review
province of this Court. One of the exceptions
exemplified by the instant case where the factual
RTC and Court of Appeals are contradictory.

mortgage is a
is beyond the
to the rule is
findings of the

That petitioners obtained loans from respondents between 1985

and 1987, which remained unpaid up to the time of the execution
of the assailed Deed of Absolute Sale, is established. 15 That
petitioners signed the assailed instrument is also not disputed.
Indeed, they admitted having signed said document qualifying,
however, that they were forced by respondents to execute the
same for the purpose of securing their indebtedness to
respondents.16 Respondents, on the other hand, insisted that the
parties executed the Deed of Absolute Sale as an honest-togoodness sales transaction.
Respondents, however, admitted further that in addition to the
amount of P200,000.00 stipulated in the Deed of Absolute Sale,
the parties agreed to write off petitioners loan as consideration of
the sale, although this clause was not expressed in the
instrument.17 From respondents admission, it can be gathered that
the assailed Deed of Absolute Sale does not reflect the true
arrangement of the parties. Now, is petitioners submission that the
parties actually agreed to subject the house and lot as security for
their unpaid obligation supported by the evidence? Did the parties
execute the assailed Deed of Absolute Sale with the intention of
subjecting petitioners house and lot covered by the deed as a
mere security for the payment of their debt?
The form of the instrument cannot prevail over the true intent of the
parties as established by the evidence. We have also decreed that
in determining the nature of a contract, courts are not bound by the
title or name given by the parties. The decisive factor in evaluating
such agreement is the intention of the parties, as shown not
necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds prior to, during and
immediately after execution of the agreement. 18 In order to
ascertain the intention of the parties, their contemporaneous and
subsequent acts should be considered. Once the intention of the
parties has been ascertained, that element is deemed as an
integral part of the contract as though it has been originally
expressed in unequivocal terms.19 As such, documentary and parol
evidence may be submitted and admitted to prove such intention.
And, in case of doubt, a contract purporting to be a sale with right
to repurchase shall be construed as an equitable mortgage. 20
Between 1985 and 1987, petitioner Nenita Romulo ("Nenita")
obtained from respondent Felisarin Layug ("Felisarin") loans in
various amounts totaling around P500,000.00. Being close friends
at that time, Felisarin did not require any written instrument to
secure payment, other than the title to the house and lot, which
Nenita handed to Felisarin sometime in 1988. 21 When respondents
demanded payment of the loan, petitioners defaulted.
Nevertheless, as admitted by Layug, despite her repeated
demands, she allowed petitioners some more time within which to
pay their debts.22 Felisarin claimed that eventually petitioners
offered their house and lot as payment for their debt because
petitioners no longer had any money.23 However, even after the
execution of the assailed Deed of Absolute Sale, respondents
continued to grant petitioners loan accommodations as evidenced
by the three promissory notes executed by petitioner Cesar
Romulo.24
Respondents continuing to lend money to petitioners does not
make sense if the intention of the parties was really to extinguish
petitioners outstanding obligation. The logical and inevitable
conclusion is that respondents deemed it wise to formalize a
security instrument on petitioners house and lot by executing the
Deed of Absolute Sale after realizing that petitioners could no
longer fully satisfy their obligation to respondents. At that time, as
petitioners were hard-pressed to come up with funds to pay their
loan, they were hardly in a position to bargain. The preponderance
of evidence shows that they signed knowing that said documents
did not express their real intention, and if they did so
notwithstanding this, it was due to the urgent necessity of obtaining
funds. "Necessitous men are not, truly speaking, free men; but to
answer a present emergency will submit to any terms that the
crafty may impose upon them."25 The circumstances surrounding
the execution of the Deed of Absolute Sale, particularly the fact
that respondents continued to extend some loans to petitioners

after its execution, precludes the Court from declaring that the
parties intended the transfer of the property from one to the other
by way of sale.
Consistent with the foregoing state of the evidence, Articles 1604
and 1602 of the Civil Code come into play. The articles provide that
when the parties to a contract of sale actually intended such
contract to secure the payment of an obligation, it shall be
presumed to be an equitable mortgage:
Art. 1602. The contract shall be presumed to be an
equitable mortgage in any of the following cases:
1) When the price of a sale with right to
repurchase is unusually inadequate;
2) When the vendor remains in possession
as lessee or otherwise;
3) When upon or after the expiration of the right
to repurchase, another instrument extending
the period of redemption or granting a new
period is executed;
4) When the vendor binds himself to pay the
taxes on the thing sold;
5) When the purchaser retains for himself a part
of the purchase price;
6) In any other case where it may be fairly
inferred that the real intention of the parties
is that the transaction shall secure the
payment of a debt or the performance of any
other obligation. (Emphasis supplied.)
Art. 1604. The provisions of Article 1602 shall also apply
to a contract purporting to be an absolute sale.
For the presumption of equitable mortgage to arise, two requisites
must be satisfied, namely: that the parties entered into a contract
denominated as a contract of sale and that their intention was to
secure an existing debt by way of mortgage. Under Article 1604 of
the Civil Code, a contract purporting to be an absolute sale shall
be presumed to be an equitable mortgage should any of the
conditions in Article 1602 be present. 26 To stress, the existence of
any one of the conditions under Article 1602, not a concurrence, or
an overwhelming number of such circumstances, suffices to give
rise to the presumption that the contract is an equitable
mortgage.27 It must be emphasized too, however, that there is no
conclusive test to determine whether a deed absolute on its face is
really a simple loan accommodation secured by a mortgage. In
fact, it is often a question difficult to resolve and is frequently made
to depend on the surrounding circumstances of each case. When
in doubt, courts are generally inclined to construe a transaction
purporting to be a sale as an equitable mortgage, which involves a
lesser transmission of rights and interests over the property in
controversy.28
The Court has not hesitated to declare a purported contract of sale
as an equitable mortgage even when only one of the enumerated
circumstances under Article 1602 is proved. 29 In the case at bar,
petitioners remained in possession of the house and lot even after
the execution of the Deed of Absolute Sale. Moreover, they
remained in possession of the property for more than the
reasonable time that would suggest that petitioners were mere
lessees thereof. For one, it took respondents more than five years
from the time of the execution of the Deed of Absolute Sale and
the Contract of Lease to file the action for ejectment. Within this
period, petitioners neither paid any rental nor exercised the option
to buy purportedly the leased property from respondents.
Incidentally, in the decisions of the MeTC and the RTC in the
separate action for ejectment, both lower courts observed that
when petitioners were made to sign a blank document, which
turned out to be a Contract of Lease of their house and lot, they
were of the belief that the blank document would serve only as
guaranty for the payment of their obligation to respondents.

The claim that petitioners possession of the house and lot was by
sheer tolerance of respondents is specious. Respondents could
not explain why they allowed petitioners more than five years to
look for another place to transfer. These circumstances only
support the conclusion that the parties never really intended to
transfer title to the property. Under paragraph 2 of Article 1602,
where the purported vendor remains in possession of the property
subject of the sale and it can be inferred that the true intention of
the parties was to secure an existing debt, the transaction shall be
deemed an equitable mortgage.
Under paragraph 1 of Article 1602, where the purchase price is
inadequate, a contract of sale is also presumed to be an equitable
mortgage. Based on respondents evidence, petitioners property
was valued at P700,000.00 but the assailed Deed of Absolute Sale
stated a consideration of only P200,000.00. Contrary to the
appellate courts declaration that the inadequacy of the purchase
price is not sufficient to set aside the sale, the Court finds the
same as clearly indicative of the parties intention to make the
property only a collateral security of petitioners debt. The Court is
not convinced that petitioners would allow the sale of their
residential property for even less than half of its market value.
The appellate court ruled that petitioners failed to rebut the
presumption of the genuineness and due execution of the
questioned Deed of Absolute Sale. Based on the examination of
the assailed instrument and the Contract of Lease and the
testimonies of the parties, the Court cannot sustain respondents
claim that petitioners offered to sell their house and lot in
satisfaction of their indebtedness. As observed by the trial court,
the Contract of Lease appears to have been signed sometime in
November 1988 or before the execution of the Deed of Sale.
Respondents were unable to explain why they had leased the
property to petitioners before its supposed purchase by
respondents. Furthermore, the records disclose that it was only
after the institution of the ejectment case did petitioners learn
about the cancellation of their title to the property although under
the assailed Deed of Absolute Sale, petitioners were obliged to
bear the expenses of its execution and registration. These
circumstances lend credence to petitioners claim of the
surreptitious manner by which respondents made them sign
certain documents without completely disclosing the real import
thereof.
The Supreme Court is clothed with ample authority to review
matters, even if they are not assigned as errors on appeal, if it
finds that their consideration is necessary in arriving at a just
decision of the case.30 Though petitioners did not raise in issue the
appellate courts reversal of the award of damages in their favor,
the Court has the discretion to pass upon this matter and
determine whether or not there is sufficient justification for the
award of damages.
The trial court described respondents acts as "malevolent,"
necessitating the award for moral and exemplary damages. An
award of moral damages would require certain conditions to be
met, to wit: (1) first, there must be an injury, whether physical,
mental or psychological, clearly sustained by the claimant; (2)
second, there must be a culpable act or omission factually
established; (3) third, the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the claimant; and
(4) fourth, the award of damages is predicated on any of the cases
stated in Article 2219.31
However, petitioners are not completely without fault. Had they
exercised ordinary diligence in their affairs, petitioners could have
avoided executing documents in blank. Respondents wrongful act,
although the proximate cause of the injury suffered by petitioners,
was mitigated by petitioners own contributory negligence. Hence,
the award of moral and exemplary damages must be reduced to
one-half of the amounts awarded by the trial court.32
WHEREFORE, the petition is GRANTED. The Decision and
Resolution of the Court of Appeals in CA-G.R. CV 63965 are
REVERSED and SET ASIDE and the Decision of the Regional
Trial Court, Branch 258, Paraaque City in Civil Case No. 96-0172

is REINSTATED with a MODIFICATION that the award of moral

and exemplary damages is REDUCED to P50,000.00 and
P40,000.00, respectively. Costs against respondents.
SO ORDERED.

National Irrigation Administration vs. Gamit 215 S

436 G.R. No. 85869 November 6, 1992
PAROL EVIDENCE: Testimony of Gamit alleging
mistake and fraud
FACTS:
In a contract of lease, Gamit leased 30,000 sqm of his
land to National Irrigation Admin for 10 yrs.
However, Gamit alleged that the contract of lease
entered into, by and between him and NIA does not
express the real agreement or intention of the parties, as
there was error or mistake of fact on the part of Gamit,
aggravated by his state of financial distress at the time
the contract was signed, and NIA acted fraudulently or
inequitably, exercising undue influence over him on
account of the latter's financial distress, in such a way
that their real agreement was not reflected or expressed
in the contract of lease signed by the parties.
According to Gamit, the real agreement or intention of
the parties was only for the lease of the twenty five
(25,000) thousand square meters by defendant at the
rate of P0.10 centavos per square meter, for a period of
ten (10) years from date of execution with the right of
defendant to purchase the area upon the termination of
the lease, on a price certain or consideration to be
negotiated and agreed upon, by and between the parties
after the lapse of the ten (10) year period.
Gamit further alleged that it was not the real agreement
or intention of the parties, at least that of herein plaintiff,
to have the rentals paid as forming part of the purchase
price later to be negotiated or agreed upon, much less
was it their intention at least on the part of herein
plaintiff, that the price shall, not exceed P25,000.00 (see
stipulation No. 4, Lease of Contract), otherwise, there
will be a gross inadequacy of the purchase price,
enough to shock the conscience of man and that of the
court; that it was not also the intention or agreement of
the parties, at least that of herein plaintiff, that in case
the lease contract is not renewed after the lapse of the
ten (10) year period, for failure of the parties to make
bilateral communication, the lessor or his successors or
assigns are deemed to have allowed continued use of
the land in suit without any additional compensation
whatsoever (see stipulation No. 8, contract of lease) and
neither was it the true agreement or real intention the
parties, at least on the part of herein plaintiff, that upon
payment of the rental amount of P25,000.00, herein
plaintiff shall be deemed to have conveyed and ceded all
his rights and interest on the subject property, in favor of
herein defendant.

ISSUE: Whether the parol evidence is admissible in this

case
HELD:
YES!
As a general rule, parol evidence is not admissible for
the purpose of varying the terms of a contract. However,
when the issue that a contract does not express the
intention of the parties and the proper foundation is laid
therefor as in the present case the court should
hear the evidence for the purpose of ascertaining the
true intention of the parties. 11
From the foregoing premises, we hold that the trial court
erred in holding that the issue in this case is a question
of law and not a question of fact because it merely
involves the interpretation of the contract between the
parties. The lower court erred in not conducting a trial for
the purpose of determining the true intention of the
parties. It failed to appreciate the distinction between
interpretation and reformation of contracts. While the aim
in interpretation of contracts is to ascertain the true
intention of the parties, interpretation is not, however,
equivalent to reformation of contracts.
"Interpretation" is the act of making intelligible what was
before not understood, ambiguous, or not obvious. It is a
method by which the meaning of language is
ascertained. 12 The "interpretation" of a contract is the
determination of the meaning attached to the words
written or spoken which make thecontract. 13 On the
other hand, "reformation" is that remedy in equity by
means of which a written instrument is made or
construed so as to express or conform to the real
intention of the parties. 14 In granting reformation,
therefore, equity is not really making a new contract for
the parties, but is confirming and perpetuating the real
contract between the parties which, under the technical
rules of law, could not be enforced but for such
reformation. 15 As aptly observes by the Code
Commission, the rational of the doctrine is that it would
be unjust and inequitable to allow the enforcement of a
written instrument which does not reflect or disclose the
real meeting of the minds of the parties. 16
Since the complaint in the case at bar raises the issue
that the contract of lease does not express the true
intention or agreement of the parties due to mistake on
the part of the plaintiff (private respondent) and fraud on
the part of the defendant (petitioner), the court a quo
should have conducted a trial and received the evidence
of the parties for the purpose of ascertaining the true
intention of the parties when they executed the
instrument in question.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 83086 June 19, 1991

REYNALDO C. HONRADO, JR., petitioner,
vs.
COURT OF APPEALS and JARDINE-MANILA FINANCE, INC.,
respondent.
A.M. Navarro Law Office for petitioner.
I.M. Barredo & Associates Law Office for private respondent.

FERNAN, C.J.:p
In this petition for review on certiorari, petitioner Reynaldo C.
Honrado, Jr. seeks the reversal of the decision of the Court of
Appeals dated August 5, 1987 1 which affirmed the decision dated
January 22, 1986 of the Regional Trial Court, Branch CXL at
Makati, Metro Manila. The dispositive portion of the affirmed
decision reads as follows:
WHEREFORE, judgment is hereby rendered ordering
defendant Reynaldo C. Honrado, Jr., to pay plaintiff MB
Finance, formerly Jardine-Manila Finance Corporation,
as follows:
1. P81,325.05, of which P40,769.00 representing
balance of the principal amount due shall earn interest of
14% per annum from January 1984;
2. P4,076.00 as liquidated damages;
3. P6,115.35 as attorney's fees; and
4. The costs of suit. 2
The factual background of this case as found by the trial court and
affirmed by the Court of Appeals is as follows:
On August 21, 1978, Hadd Construction and Trading Corporation
(HCTC for brevity) purchased on installment basis a Toyota Corolla
Hardtop, 2 Door, 1978 Model with Engine No. 3K-7515608, Serial
No. KE 35-915409, Plate No. B-YE-290 from Cressida Sales
Corporation (Cressida for brevity). HCTC represented by petitioner
Reynaldo C. Honrado, Jr. as president, executed a promissory
note in favor of Cressida, in the amount of P49,120.20, payable at
the rate of P1,364.45 a month for thirty six (36) months beginning
September 25, 1978 and every 25th day of the month thereafter
until full payment. In said promissory note, HCTC agreed to a
waiver of formal demand and presentment as well as notices of
protest and dishonor, among others. Petitioner Honrado signed the
promissory note a second time as co-maker of HCTC. 3 A chattel
mortgage on the motor vehicle was also executed by HCTC in
favor of Cressida.
On September 4, 1978, Cressida executed a deed of assignment
of the promissory note with warranty of soundness in favor of
Jardine-Manila Finance, Inc. for and in consideration of
P30,985.54. This was executed with HCTC's conformity,
represented again by petitioner as its president. Petitioner
Honrado likewise signed this deed of assignment as co-maker. 4

For failure of HCTC to pay the monthly amortization as stipulated

in the promissory note, private respondent Jardine-Manila Finance,
Inc. filed on May 22, 1979 an action for replevin and damages with
the Regional Trial Court of Makati, Branch CXL docketed as Civil
Case No. 2096, praying for the seizure and delivery of the
questioned motor vehicle to private respondent, with alternative
prayer, that in the event the normal delivery of the motor vehicle
cannot be effected, judgment be rendered ordering HCTC to pay
P41,011.34 with 14% interest per annum from the date the
obligation became due and demandable until fully paid. Private
respondent impleaded petitioner Reynaldo Honrado, Jr. as partydefendant on the contention that he signed the documents as comaker.
After an answer with compulsory counterclaim was filed on
November 7, 1981 by herein petitioner as defendant therein, the
case was thereafter set for pre-trial conference.
On September 14, 1983, private respondent informed the trial
court that it was waiving the recovery of the motor vehicle and
chose to pursue instead its alternative prayer considering that
since the filing of the complaint, it has not been able to recover
said motor vehicle, and that even if recovered, its current value
would not allegedly be commensurate to the amount of
P41,011.34.
On the same day, private respondent moved to dismiss the case
against HCTC without prejudice on the ground that summons
could not be served on said defendant corporation since it was no
longer holding office at its given address and its present address
could not be ascertained. This motion was granted by the trial
court on October 3, 1983.

President of the Hadd Construction & Trading Corp. and

again as co-maker in his private capacity (Exhibits "A-2"
& "A-3"). Appellant also signed the Deed of Chattel
Mortgage and the Affidavit of Good Faith four (4) times;
twice as President and twice as co-maker (Exhibit "B").
And the appellant lastly signed his conformity to the
Deed of Assignment (Exhibit "C") as president and again
as co-maker.
From the above facts, petitioner, by signing these documents
several times as co-maker, is presumed to be aware of the
consequences of his actions. Considering that petitioner Honrado
is of age and a businessman, holding the highest position in Hadd
Construction Trading Corporation, he is presumed to have acted
with due care, and to have signed the documents in question with
full knowledge of its contents as well as the attendant obligations
and responsibilities. As aptly observed by the trial court:
. . . defendant Honrado is presumed to have intended the
ordinary consequences of his voluntary act and taken
ordinary care of his concerns. When defendant signed
eight times on three documents, and always as president
and as co-maker, it is presumed that he had exercised
care in verifying his involvement in the transaction,
considering his age, business life, intelligence and the
fact that he occupied the highest office in the corporation.
6

Furthermore, there is no evidence of fraud. Petitioner on crossexamination testified as follows:

Q At the left hand margin of the
promissory note there appears a
signature over the name Reynaldo C.
Honrado
Jr.,
President,
Hadd
Construction and Trading Corp. Will
you kindly tell us if this is your
signature?

In due time, the trial court rendered the assailed decision against
petitioner who seasonably appealed to the Court of Appeals. On
August 5, 1987, the Court of Appeals promulgated its decision
affirming that of the trial court.
Hence the present recourse of petitioner.
To support his prayer for reversal of the appellate court's decision,
petitioner argues that he signed the promissory note and deed of
chattel mortgage in his official capacity as president of HCTC only.
He never intended to sign these documents as co-maker. Thus,
petitioner in his Memorandum raises the following issues:
1) WAS PRIVATE RESPONDENT CORRECT IN ITS
CONTENTION THAT PETITIONER WAS A CO-MAKER
OF HCTC IN THE EXECUTION OF THE PROMISSORY
NOTE AND DEED OF CHATTEL MORTGAGE IN
QUESTION?
2) WAS THE COURT OF APPEALS CORRECT IN ITS
INTERPRETATION OF SUBJECT PROMISSORY NOTE
AND DEED OF CHATTEL MORTGAGE IN FAVOR OF
PRIVATE RESPONDENT AND AGAINST PETITIONER?
5

On the first issue, petitioner Honrado vehemently denies any

liability as co-maker of HCTC on the ground that the body of the
documents in question, namely, the promissory note and deed of
chattel mortgage, indicates that the contract was between HCTC
and Cressida only. In addition, petitioner cites the testimony of Mr.
George Caruncho, the sales agent of Cressida, who stated that
petitioner was asked to sign these documents in his official
capacity as president of HCTC.
We find no merit in the above contention. Petitioner Honrado
cannot plead that he signed these documents in his official
capacity only as president of HCTC and not as co-maker with
HCTC. The documents in question, including the deed of
assignment which contains petitioner's signatures as co-maker,
whose genuineness and due execution were admitted by
petitioner, clearly indicate otherwise. As stated by respondent
Court of Appeals:
The promissory note (Exhibit "A") clearly shows on its
face that the appellant signed the same in his capacity as

A Yes, sir.
xxx xxx xxx
Q Also, at the right hand margin of the
promissory note there appears a
signature above the typewritten name
Reynaldo C. Honrado, Jr., co-maker,
is this your signature?
A Yes, sir, that is my signature. 7
Since petitioner Honrado did not question and in fact admitted the
genuineness and due execution of these documents, including the
genuineness of his signatures, then these documents must be
given legal effects.
The testimony of the sales agent, Mr. Caruncho, can not change
the legal effect of these documents. Granting that he told petitioner
to sign these documents in his official capacity as president of
HCTC the mere fact that petitioner also signed voluntarily as comaker proves his participation in the transactions as a co-maker.
Furthermore, Mr. Caruncho testified that when petitioner signed
these documents, all the type-written words already appeared
therein.
On the matter of interpretation of contracts, it is basic and
fundamental that if the terms of the contract are clear, the literal
meaning of the stipulation shall control. 8 The intention of the
parties to a contract must be determined from the contract itself.
When petitioner Honrado signed several times on these
documents as president of HCTC and as co-maker, there is no
other interpretation but to conclusively presume that he bound
himself also as co-maker. He cannot therefore renege on the
obligations and liabilities attached to a co-maker. When the terms
of a contract are clear and do not leave room for doubt as to the
intention of the contracting parties, it is not necessary to interpret
the same, the literal meaning of its clauses should be followed. 9

The promissory note clearly stipulates a solidary obligation as

shown by the following clause "For value received I/We jointly and
severally promised to pay Cressida Motor Sales Corp. . . . Signed:
Hadd Construction & Trading Corporation by Reynaldo C.
Honrado, Jr., President and Reynaldo C. Honrado, Jr., Co-maker".
In the case of Parot vs. Gemora, 10 this Court had occasion to
state:
Where a promissory note is signed by two or more
persons promissing to pay the amount of the said note
juntos o separadamente, such co-makers are individually
liable for the payment of the full amount of the obligation
of such contract.
Therefore, petitioner Honrado is solidarily liable to pay the full
amount of the obligation as stipulated in the promissory note to
which private respondent is entitled.
However, the award of P81,325.00 based on the Statement of
Account as of December 10, 1983, 11 prepared by private
respondent includes other charges aside from the principal
obligation. These charges have not been satisfactorily proved
during the trial. Moreover, a careful examination of the records of
the case failed to support these charges. The records are bereft of
any evidence to show how these charges were computed nor is
there an adequate showing that private respondent is entitled
thereto. A mere mention of the outstanding obligation of petitioner
in the amount of P81,747.05 as of December 10, 1985 in the
testimony of Alfonso Flores, private respondent's manager for
collection, 12 is not sufficient without proof presented before the
court of the expenses and other charges imputed to petitioner.
Thus, in the interest of justice and equity, petitioner should be
liable only for the outstanding balance based on the promissory
note in the amount of P40,769.00. This is computed by deducting
the total payments equivalent to four (4) monthly installments
made by HCTC in the amount of P8,351.20 from the principal
amount of the promissory note of P49,120.20. In addition, this
amount of P40,769.00 shall earn interest at the rate of 14% per
annum to be computed from March 10, 1979 when the total
amount of the principal obligation became due and demandable 13
until actual payment. The award of 10% liquidated damages and
15% attorney's fees based on the principal obligation is found to be
equitable.
WHEREFORE, the assailed decision is hereby AFFIRMED, with
modification as indicated below, ordering petitioner Honrado to pay
private respondent MB Finance, formerly Jardine-Manila Finance
Corporation as follows:
1) P40,769.00 with 14 % interest per annum from March 10, 1979
until actual payment;
2) P4,076.90 as liquidated damages;
3) P6,115.35 as attorney's fees; and
4) The costs of the suit.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-64143 February 28, 1986
PREMIER INSURANCE & SURETY CORPORATION, petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT and MAURO M.
CASTRO, respondents.

GUTIERREZ, JR., J:
This is a petition to review an amended decision of the Court of
Appeals, now Intermediate Appellate Court, insofar as it declared
the private respondent not jointly and severally liable with
Benjamin R. Sarmiento to the petitioner under an agreement and
statement of warranties executed in connection with the sale of a
parcel of land.
The property purchased by the petitioner is a 17,121 square meter
lot in lbayo, Paranaque covered by Transfer Certificate of Title No.
254170 in the name of Benjamin R. Sarmiento. The lot was
declared for taxation purposes and covered by a certificate of
payment of real property taxes. There was also a subdivision plan
and a vicinity map of the property. Respondent Castro handled the
sale for the registered owner.
When the petitioner's board of directors resolved to buy the
property for P22.00 a square meter, it imposed a condition that the
location and vicinity plans would be verified by a reputable
surveyor and the legal papers pertaining to the property should be
verified to be genuine, true, and correct.
The petitioner's board of directors authorized its treasurer, Mr.
Manuel Chua to act for the corporation in negotiating and
consummating the sale. The petitioner also engaged the services
of Honorato R. Sta. Maria, a geodetic engineer and surveyor, for
the purpose of verifying the ownership and title of the land and
Identifying and relocating the property.
While the corporation's engineer-surveyor was conducting his
verification, respondent Castro submitted to it a deed of absolute
sale executed by Benjamin Sarmiento conveying to the petitioner
the subject parcel of land. Manuel Chua signed the deed in behalf
of the petitioner but it was agreed that the purchase price would be
paid only upon receipt of the full report of Geodetic Engineer Sta.
Maria.
The sale was registered and a transfer certificate of title issued in
the name of the petitioner. When the transfer certificate of title and
the other papers were delivered to the petitioner, respondent
Castro stated in writing that it was understood that the surveyor's
report would be submitted in a day's time. He also asked for an
acknowledgment that, notwithstanding the sale and transfer, his
client had not yet been paid the agreed consideration for the sale.
The initial report of Engineer Sta. Maria was apparently
satisfactory to Mr. Manuel Chua because four (4) checks in the
amount of P150,000.00 were given to respondent Castro for
delivery to Benjamin Sarmiento as part payment of the purchase
price for the land.
Shortly after turning over the checks, however, the petitioner
ordered their payment stopped. Sarmiento also had some
problems encashing the petitioner's crossed checks. To enable the

payment of the purchase price, respondent Castro not only

presented a special power of attorney from Sarmiento but also
executed the "Agreement and Statement of Warranties" which is
now disputed in this petition for review.

SIMULATED, NOT INTENDED TO BE ENFORCED,

AND WAS ONLY A FORMALITY.

The agreement and statement reads:

THE RESPONDENT COURT, IN REVERSING ITS

ORIGINAL., DECISION, ERRED IN HOLDING THAT
PETITIONER CANNOT ENFORCE THE STIPULATIONS
IN THE AGREEMENT AND STATEMENT OF
WARRANTIES BECAUSE RESPONDENT SIGNED THE
SAME IN HIS PERSONAL CAPACITY AND NOT AS
AGENT OF BENJAMIN SARMIENTO AND THERE WAS
NO AUTHORITY GIVEN HIM ON THIS MATTER.

NOW THEREFORE, for and in consideration of the premises, I

hereby warrant to the Premier Insurance and Surety Corp. that
Benjamin R. Sarmiento was until his sale of the above-mentioned
property to the Premier Insurance & Surety Corp., the true and
absolute owner of the said property, and that the same was, at the
time of said sale, free from all liens and encumbrances, and that
said Benjamin R. Sarmiento had the legal right to execute the
above mentioned Deed of Absolute Sale;
That I hereby hold myself jointly and severally liable with said
Benjamin R. Sarmiento in whatever liability he might have in
connection with the Vendor's warranties in the above-mentioned
Deed of Absolute Sale;
That, after first being duly sworn, I also certify that the said
Benjamin R. Sarmiento whom I have known for more than four
years, is a person of juridical capacity and with legal capacity to
act and that he is of legal age and single.
Upon the execution of the above warranty, the petitioner paid the
entire consideration of P376,662.00, giving the checks to
respondent Castro for delivery to Sarmiento.
Later on, when the petitioner tried to sell the piece of land to Solid
Realty and Financing Corporation, it discovered that there were
actually two Torrens titles to the same property. One title, that of
Benjamin R. Sarmiento, had been acquired from a certain Teresita
Lorenzo who executed an absolute deed of sale in his favor on
June 11, 1969. Teresita Lorenzo in turn secured her Original
Certificate of Title through a Miscellaneous Sales Patent dated
June 24, 1967 from the Bureau of Lands.
The other title in the names of Caridad Almendras and Alejandro
D. Almendras came from a certain Justina Lorenzo who sold the
lot to them on February 10, 1970. The original title of Justina
Lorenzo was issued pursuant to a judgment dated January 9, 1967
and a decree dated October 8, 1968 rendered by the Court of First
Instance of Rizal in LRC Case No. T-70.
The trial court sustained the Almendras' title as the valid title and
declared the Sarmiento's title null and void. It also absolved the
Register of Deeds of Rizal and the Assurance Fund of the National
Treasury from any liability. Benjamin Sarmiento and respondent
Castro were declared jointly and solidarily liable for the
P376,662.00 consideration for the sale P3,850.00 expenses
incurred during the sale, 12 percent interest per annum from
August 14, 1969, P20,000.00 attorney's fees, and costs. As earlier
stated, the Court of Appeals in its amended decision absolved
respondent Castro from any liability arising from his agreement
and statement of warranties. It is with regards to this amended
decision that the petitioner raises the following assignments of
errors:
I
THE RESPONDENT COURT, IN CONCLUDING THAT
THE
AGREEMENT
AND
STATEMENT
OF
WARRANTIES DID NOT EXPRESS THE TRUE INTENT
OF THE PARTIES, FAILED TO REALIZE THAT IT
GRANTED A REFORMATION OF AGREEMENT
WITHOUT THE RESPONDENT CASTRO SATISFYING
THE WELL-SETTLED STRINGENT REQUIREMENTS
FOR REFORMATION OF INSTRUMENTS.
II
THE RESPONDENT COURT, IN REVERSING ITS
ORIGINAL DECISION, ERRED IN CONCLUDING THAT
THE
AGREEMENT
AND
STATEMENT
OF
WARRANTIES DID NOT EXPRESS THE TRUE INTENT
AND AGREEMENT OF PARTIES, THAT IT WAS

III

IV
THE RESPONDENT COURT, IN REVERSING ITS
ORIGINAL POSITION, ERRED IN CONCLUDING THAT
THERE WAS NO CLOUD OF DOUBT DURING THE
WHOLE PERIOD OF SALE AS REGARDS TO
PARTNERSHIP
AND
TlTLE
OF
BENJAMIN
SARMIENTO, AS SUCH CONCLUSION WAS BASED
ON MISAPPREHENSION OF THE EVIDENCE ON
RECORD.
The petitioner contends that the appellate court in ruling that the
"Agreement and Statement of Warranties", Exhibit "L" was a mere
formality which did not express the true intent of the parties was, in
effect, granting a reformation of the instrument without legal basis.
It states that there is no basis for reformation.
According to the petitioner, Exhibit "L" is explicit and clear, leaving
no room for different interpretation, that it was drawn in clear and
simple language, and that it could not have possibly misled
respondent Castro, a lawyer with vast experience and superior
knowledge in this line of business, It states that the private
respondent with his experience and knowledge would not have
involved himself in a liability to pay the full price of the land without
having received its equivalent value.
Crucial to the resolution of this petition are two factual issues
resolved by the respondent court against the petitioner(1)
whether or not Benjamin Sarmiento is a fictitious person whom the
petitioner's officers never met personally, and (2) whether or not
the petitioner ordered the stop payments on the four (4) checks
representing the initial payments because of doubts about the
validity of Sarmiento's title.
We affirm the factual findings of the respondent court. The
testimony of the respondent on these issues is not only credible
but is also unrebutted by the petitioner. It states:
Q Mr. Witness, what you have testified the last
time, is that (you testified that) after the
execution of the deed of sale, plaintiff Premier
Insurance and Surety Corporation paid
Sarmiento several post dated checks and four
(4) of which are in the amount of (P150,000.00)
One Hundred Fifty Thousand Pesos, now
represented and covered by the receipt marked
as Exhibit J namely: ABC Check No. 1507
Metropolitan No. 374697, and PPC 1146821,
Check No. 736140, do you know whether or not
Mr. Sarmiento was able to encash these four
checks which are stated in your receipt of
August 7, 1969, Exhibit J?
A I know that Mr. Sarmiento had not been able
to encash one of the two checks which I cannot
remember that the checks as evidenced by my
receipt were crossed check for deposit, sir.
Q Did you deliver to Mr. Sarmiento the four (4)
checks that were received by you under this
receipt Exhibit J?
A Yes, sir I delivered.

Q When you delivered these checks you said

that these checks were crossed checks. What
did Mr. Sarmiento do with said checks?
A Mr. Sarmiento wanted to encash those
checks because he needed very badly to bring
the money to Pangasinan and he requested me
to help him to encash the crossed checks
marking on the checks to cancel the crossed
markings, so that he can cash the checks, sir.
Q Why, did you accede to his request that you
had the checks, the crossed-checks, the
markings on the crossedchecks be cancelled
and encash the same?
A Yes, sir I told him to bring the check to the
Premier Insurance & Surety Corporation and
have the crossedchecks markings be removed.
Q Were you able to have these checks, the
cross markings, cancelled at the Premier
Insurance & Surety Corporation, Mr. Witness?
A I accompanied Mr. Sarmiento and we both
saw Mr. Manuel Chua of the Premier Insurance,
rather we both saw Mr. Manuel Chua the
Treasurer of plaintiff corporation and he agreed
to cancel the crossed markings on the checks,
sir.
Q Now, Mr. Manuel said-Now, Mr. Manuel Chua
said when he testified before this Honorable
Court that the Premier Insurance & Surety
Corporation, the plaintiff corporation in this
case, that it had actually stopped the payment
of these four (4) checks because you were not
able to present Mr. Sarmiento to him, is that
correct, Mr. Witness?
A Precisely, I brought Mr. Sarmiento to Mr.
Manuel Chua in connection with his request to
cross the crossedmarkings on the checks and
Mr. Manuel Chua met Mr. Sarmiento and Mr.
Chua agreed to remove the crossed markings,
'crossed checkson those checks, sir.
Q What then was the reason . . . Were the
payment of those checks however, stopped, Mr.
Witness?
A Yes, the payments were stopped because
notwithstanding that the cross markings were
removed, Mr. Sarmiento was unable to encash
the checks for the reason that Mr. Manuel Chua
refused to sign on the dorsal side Identifying
the signature of Mr. Sarmiento. Subsequently,
Mr. Sarmiento was informed of the stoppayment order; that nevertheless and after
sometime Mr. Sarmiento was informed that with
respect to the check the two checks were
stopped payment on the two checks was
stopped by Premier Insurance & Surety
Corporation
Q Did you eventually come to know the reason
why at least two (2) of the four (4) checks were
stopped payment?
A Mr. Sarmiento and I went to see Mr. Manuel
Chua. Although he did not tell Mr. Sarmiento
certain matters and Mr. Chua instead he
confided to me that certain funds of the Premier
Insurance & Surety Corporation were invested
or placed in the money market of General
Acceptance and Finance Corporation were not
yet really cancelled but rather the checks
bounced for insufficient funds.

Manuel Chua, therefore, transacted personally with Sarmiento and

the initial checks were cancelled because of insufficiency of funds
at that time. That the petitioner could not have doubted the title
during the negotiations leading to the sale and during the payment
of the consideration is shown by the report of the engineersurveyor which it commissioned to investigate the purchased
property. Respondent Castro stresses that he did not know
Engineer Sta. Maria and-that there is no intimation at all in the
records that he had any knowledge about the verifications and
reports submitted by Mr. Sta. Maria to the petitioner.
The Sta. Maria report states that "as far as authenticity of the titles
are concerned, there is no question the present title of Benjamin R.
Sarmiento is genuine." The report apprised the petitioner of a
possible risk of overlapping claims with third parties who may have
claimed under voluntary registration. Mr. Sta. Maria described the
risk as "minimal" because the risk was attributed only to
government negligence in selling the lot to Teresita Lorenzo
without ascertaining her actual occupation or introduction of
improvements, which are requisites for miscellaneous sales
patents.
The so-called doubts of the petitioner, if any, could not have
referred to the Almendras' title because Engineer Sta. Maria
looked into this matter and specifically reported it to the petitioner.
Thus his report on verification of ownership (Exhibit "I") reads in
part:
A research in the Bureau of Lands, Land Registration Commission,
Court of First Instance of Rizal, and the Court of Appeals of cases
of conflicting claims and overlapping surveys in the vicinity of
Barrio Ibayo, Municipality of Paranaque, Province of Rizal did not
reveal any.
An alleged claim that Lot 3641 of which Lot 3641-A is a portion is
in conflict with plan Psu-170496 (Caridad C. Almendras) was
verified to be true in 1967. However, prior to the issuance of
Original Certificate of Title No. 156, the conflict was resolved in
favor of the government. As a result, on August 7, 1967, the
original plan Psu170496 was corrected giving way to the release of
the portion applied under Miscellaneous Sales Patent. The Land
Registration case covering the amendment of Psu-170496
(Caridad C. Almendras) is Land Registration Case No. N-2183,
Land Registration Commission Rec. No. N-16585.
Outside of the above-mentioned case, our researchers have not
found any other possible risk of future litigation which may involve
the lot in question.
It is clear from the records that the petitioner corporation took the
necessary steps to have the property it was purchasing as well as
all papers relative to the purchase verified before it paid the agreed
consideration.
The private respondent contended in his defense that the special
power of attorney constituted him an attorney-in-fact of Sarmiento
only for purposes of collecting the purchase price of the property.
Sarmiento was then in Pangasinan campaigning for the candidacy
of Luis Garcia who was running for Congress.
The private respondent states:
xxx xxx xxx
. . . Defendant Castro could not have guaranteed the title
of defendant Sarmiento since the property was covered
by a torrens certificate of title which on its face did not
disclose any liens or encumbrances on said property,
and consequently any party dealing with said property
has the right to assume that the registered owner had
clean title to the property and the right to convey title
thereto for such is the very foundation of our Torrens
System. Any undertaking on the part of defendant Castro
to further guarantee the title of the vendor of said
property was superfluous and was furthermore null and
void for lack of consideration. Actually the true intention
of the parties to the Agreement and Statement of

Warranties, Annex "D" to the Complaint, namely plaintiff

and defendant Castro was that Castro was merely to
guarantee that the payment of the purchase price was to
Benjamin R. Sarmiento, the registered owner of the
property, and that any payment made to him (Castro) as
attorney-in-fact of Benjamin R. Sarmiento would
discharge plaintiff from any further liability with respect to
the purchase price of the property. The reason why
Sarmiento had to appoint any attorney-in-fact to receive
payment for him was that at that time he (Sarmiento) was
residing in the province and since the actual date of
payment was not certain because plaintiff wanted first to
wait for the result of the relocation survey and
investigation being undertaken by Engineer Sta. Maria, it
would be very inconvenient for him (Sarmiento) to come
from time to time to Manila to verify whether the
payments are already ready. Defendant Castro and
Manuel Chua, the duly authorized representative of
plaintiff, has had several previous business and
professional dealings in the past and as a matter of fact
defendant Castro was the lawyer who handled Manuel
Chua's naturalization case.
In trying to convince the appellate court of the above as the true
meaning and intent of the agreement of warranty, the respondent
pointed to his close personal relations with the petitioner's principal
officers, its president Vicente Sayson, treasurer Manuel Chua, and
legal counsel Dean Feliciano Jover Ledesma. When Sayson was
president of Filipinas Merchandising Corporation, which handled
the importation of reparations goods from Japan, respondent
Castro was vice president and legal counsel. The respondent was
also the lawyer of Manuel Chua since 1954 and apart from the
latter's naturalization case handled land transactions such as the
acquisition by Chua of the Golden Gate Hotel.
The respondent pointed to indices of close relationship to sustain
his version of the meaning of the disputed agreement:
1. The Deed of Absolute Sale (Exhibit B) was executed
on 1 August 1969. Even before payment of the purchase
price, appellant acceded to the request of Chua that the
sale be immediately registered in the name of plaintiffappellee and, accordingly, appellant convinced
Sarmiento to agree to the request and to cause such
registration, as in fact it was so registered.
2. Notwithstanding that the agreement on the sale
document was for full payment of the purchase price in
cash, appellant made representations for and in behalf of
plaintiff-appellee to be allowed to make a partial payment
of the purchase price. So that, even after the surveyor's
reports (Exhibits L and L-1), plaintiff-appellee paid only
P150,000 notwithstanding the commitment of its board of
directors to pay in full after receiving the said surveyor's
reports.
3. Even after the execution of the 'Agreement and
Statement of Warranties' on 14 August 1969, appellant
made representations with Sarmiento, for and in behalf of
plaintiff-appellee, to accept plaintiff-appellee's checks
post-dated to 22 August, 4 September, 23 September, 11
October and 16 October 1969 in varying amounts (Vide,
Exhibits M-4 to M-9, inclusive).
Ordinarily business transactions of this nature would
have required strict adherence to and enforcement of
verbal and written agreements, especially as to the
payment of the stipulated consideration. But, because of
appellant's close relationships with the officers of plaintiffappellee, appellant prevailed upon Sarmiento to
accommodate plaintiff-appellee's repeated departures
from the strict compliance of its obligations even without
the formalities of a written amendment to a duly executed
sale agreement.

The same close relationships impelled appellant to

overlook the strict formalities in the preparation, and
terminologies, of the disputed Agreement.
In retrospect, he should not have allowed sentimentalities
to rule his conduct or his decision, he should have
insisted on a strict literal documentation of agreements,
representations and assurances made by plaintiffappellee's officers. But, it must be appreciated that at that
time, when no one had any inkling that anything was
amiss or would eventually go wrong-at least not in
appellant's mind-it seemed out of step and totally
incongruous with the spirit of mutual trust and friendship
that pervaded the transaction for appellant to doubt the
verbal assurances made and to require them to be
placed in writing.
To hold appellant liable, therefore, to the strict, literal
terms of the questioned Agreement would be to put
undue reliance on the words employed by the parties
therein to the total disregard of their true intention and
agreement and it would thus be grossly unfair, iniquitous
and unconscionable to enforce the same against
appellant."
The petitioner cites Article 1359 of the Civil Code on reformation of
instruments and the case of Bank of the Philippine Islands v.
Fidelity & Surety Co. (51 Phil. 57) to show that there is no proof of
the clearest and most satisfactory character of a mutual mistake as
would justify a reformation of the Agreement. We agree with the
private respondent that he was only introducing evidence on the
true intent and meaning of the instrument as a matter of defense
and that the exception to the parol evidence rule is more in point.
While it is a general rule that parol evidence is not admissible for
the purpose of varying the terms of a contract, when an issue is
squarely presented that a contract does not express the true
intention of the parties, courts will, when a proper foundation is laid
therefore, hear evidence for the purpose of ascertaining the true
intention of the parties. Once the intent is clear, then it shall prevail
over what on its face the document appears to be. (Labasan v.
Lacuesta, 86 SCRA 16, 22). The court does not reform the
instrument. It remains as it was written. However, the court
receives evidence to find out how the parties really bound
themselves. The second exception to the parol evidence rule
enables the court to ascertain the intent of the parties.
Respondent Castro testified that it was petitioner's counsel the late
Dean Jover Ledesma who prepared the disputed Agreement,
Exhibit "L" and states that the testimony of Manuel Chua on Exhibit
"L" and on the warranty assumed by Castro should not be given
any credence because Chua had no part in Ledesma's preparation
of Exhibit "L" nor was Chua present during the conversation and
understanding between Ledesma and Castro as to the purpose
and object of the Agreement. In fact any ambiguity must be
construed against the party who drafted the document.
(Coscolluela v. Vaiderama, 2 SCRA 1095).
Respondent Castro tries to resuscitate the issue on the nullity of
Sarmiento's title, to wit:
xxx xxx xxx
. . . [T]he Original Certificate of Title 156 Exh. S) issued
to Teresita Lorenzo, Sarmiento's vendor, on the basis of
a Miscellaneous Sale Patent (predated the registration of
the land in question by Justina A. Lorenzo, the vendor of
the Almendras spouses. Teresita's title, O.C.T. No. 156,
was issued on June 24, 1967 yet, while that of Justina's
O.C.T. No. 8318 was issued only on October 30, 1969
and transcribed in the Registration Book of the Registry
of Rizal only on November 5, 1969. Even the decree
from which it sprung was issued by the Court of First
Instance of Rizal in LRC Case No. N-70 only on October
8, 1968. Nowhere in the abovequoted portions of
petitioner's brief is it contended, much less alleged as

proven, that any irregularity or flaw attended the issuance

of O.C.T. No. 156 to Teresita Lorenzo, To be sure, if there
is anything questionable in the above narration in
petitioner's brief, it is the unexplained registration of the
land issue in favor of Justina A. Lorenzo when there was
already an outstanding title in the name of Teresita
Lorenzo duly issued more than two (2) years earlier and
which has not been shown to have been invalidated by
any duly constituted authority whether judicial or
administrative. . .
This issue is no longer before us. The trial court has decided that
the Almendras title is the valid title and not that of Sarmiento. Since
the petitioner cannot recover what it paid either from Sarmiento or
from the Assurance Fund, the only issue is whether it should be
allowed to recover from Sarmiento's lawyer and attorney-in-fact or
whether, under the circumstances, it should shoulder the loss
itself.
The petitioner has failed to sustain its contention that the
respondent court committed clearly reversible errors in drawing
erroneous conclusions from established facts. We apply the
established rule that the findings of facts of the appellate court are
deemed conclusive unless it is shown that there is no substantial
evidence to support them (Amigo v. Teves, 96 Phil. 252; AlsuaBetts v. Court of Appeals, 92 SCRA 332). There is no such
showing.
WHEREFORE, the petition for review is DISMISSED for lack of
merit. The judgment of the appellate court is AFFIRMED. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-10573

April 29, 1957

THE PEOPLE OF THE PHILIPPINES, petitioner,

vs.
HON. MACAPANTON ABBAS, Judge of the Court of First Instance
of Sulu, 16th Judicial District and DATU MOHAMMAD DANIAL,
respondents.
Office of the Solicitor General Ambrosio Padilla and Solicitor Antonio
A. Torres for petitioner.
Abraham Rasul and Briones, Pascual and Associates for respondents.
MONTEMAYOR, J.:
This is a petition for certiorari to set the order of respondent Judge
Macapanton Abbas of the First Instance of Sulu, in Criminal Case No.
1155 for violation of the Usury Law, against Datu Mohammad Danial,
issued on March 28, 1956, in course of the trial of said case, sustaining
the objection of the defense to the introduction by the prosecution of
parol evidence to show that the document entitled "Deed of Sale of
Real Property with Right to Repurchase" was really contract of loan
secured by a mortgage, tainted with usury.
The amended information filed by the fiscal in said criminal case reads
as follows:
That on or about September 15, 1952, in the Municipality of
Jolo, Province of Sulu, Philippines, and within the jurisdiction
of this Honorable Court, the above-named accused made a
loan of P3,000 to the spouses Asaali Gani and Indah Atung
Gani, which was to be secured by a contract of a pacto de
retro sale of a portion of a building belonging to the
aforenamed couple, situated at the corner of Serantes Street
and a still unnamed road, of the Municipality of Jolo,
Province of Sulu, Philippines, and that the said accused, in
order to cover up his usurious transaction with the
aforenamed Asaali Gani and Indah Atung Gani, made it
appear in the aforementioned contract of pacto de retro sale
executed between them that the whole amount loaned was
P5,500, when in truth and in fact, the real and true amount
loaned and received by the aforesaid Asaali Gani and Indah
Atung Gani was only P3,000, the additional amount of
P2,500 represented the interest for five (5) months of P500
per month, and that on or about the period comprising
between the end of September, 1952 up to April 1953, in the
same municipality of Jolo, Province of Sulu, Philippines, the
said accused did then and there take and receive from the
said Asaali Gani and Indah Atung Gani the sum of P250,
P900 and P2,500 as interest on the said loan of P3,000,
thereby willfully, unlawfully and feloniously taking and
receiving an interest which is very much higher than that
prescribed by law, to the damage and prejudice of the
aforesaid Asaali Gani and Indah Atung Gani in the total
amount of P3,650, Philippine currency.
During the trial, Asaali Gani, one of the vendors in the deed of sale,
was presented as a witness by the fiscal, and while testifying, he was
made to identify the deed of sale which was marked as an exhibit, and
was asked by said fiscal why the document was called deed of sale
with pacto de retro if the real contract between the parties was one of
loan. The defense objected to the question on the ground that no
evidence of the terms of the agreement or contract other than the
contract itself and its contents shall be allowed. The respondent Judge
sustained the objection of the defense and later requested the
prosecution and the defense each to submit a memorandum in support
of their respective contentions. Later, respondent judge issued his

order of March 28, 1956, definitely sustaining the objection to the

introduction of parol evidence intended to alter the terms of the deed of
sale with pacto de retro, on the ground that "to hold otherwise would be
to establish a very dangerous doctrine which would throw wide open
the doors to fraud . . . and allow defaulting mortgagors and vendors a
retro to harass those from whom they might have come for financial
help.

In view of the foregoing, the petitioner is granted and the order

complained of is set aside. Respondent Judge is hereby directed to
allow the question, the objection to which he had previously sustained,
and, otherwise, to permit the prosecution to introduce parol evidence to
prove the allegations of the information. No costs.

We find an extended discussion of the question involved to be

unnecessary for the reason that the said legal point has already been
passed upon and definitely determined by this Court. In the case of
Cuyugan vs. Santos, 34 Phil., 113, this Tribunal said:

Republic of the Philippines

SUPREME COURT
Manila

. . . The American doctrine on this subject does not differ

materially from the principles set forth in our Civil Code.
We insert here an extract of some length from the discussion
of the subject (supported by numerous citations of authority)
found in Jones' Commentaries on Evidence, (1913) volume
3, paragraphs 446, 447:
446. To show that instruments apparently absolute are only
securities. It has long been the settled rule that in courts
exercising equitable jurisdiction it is admissible to prove by
parole that instruments in writing apparently transferring the
absolute title are in fact only given as security. The doctrine
is thus stated by Mr. Field: "It is an established doctrine that
a court of equity will treat a deed, absolute in form, as a
mortgage when it is executed as security for loan of money.
That court looks beyond the terms of the instrument to the
real transaction; and when that is shown to be one of
security and not of sale, it will give effect to the contract of
the parties. As the equity, upon which the court acts in such
cases, arises from the real character of the transaction, any
evidence, written or oral, tending to show this is admissible. .
..
In the case of U.S. vs. Constantino Tan Quingco, Chua, 39 Phil., 552,
we held:
The form of the contract is not conclusive. Parol evidence is
admissible to show that a written document through legal in
form was in fact a device to cover usury. If from a
construction of the whole transaction it becomes apparent
that there exists a corrupt intent to violate the Usury Law, the
Court should, and will permit no scheme, however ingenious
to becloud the crime of usury.
We find no reason for modifying otherwise abandoning the doctrine
laid down in the above-cited cases. Otherwise, it would be very and
next to impossible to prove a usurious transaction behind a cleverly
prepared contract, which is clothed with all the outward forms and
requisites of a valid contract of pacto de retro with right of repurchase.
Just as the courts will go through and beyond the form of a contract of
sale with pacto de retro in order to determine the real agreement
between the parties, which is only an equitable mortgage to secure a
loan, so they (the courts) may do the same and disregard the
seemingly valid terms of a deed of sale with right to repurchase, and
arrive at the conclusion that the transaction was only that of a loan,
with interest beyond the legal rate. This is done specially when the
attendant circumstances indicate that the transaction between the
parties could not have been one of sale.
In the present case, according to the terms of the "Deed of Sale of
Real Property with Right to Repurchase", the property sold is one-half
of a building with an assessed value of P36,000. One-half of said
assessed value is P18,000. It is of common knowledge that the
assessed value of real property, specially in the provinces, is far below
the real and market value of the same, some times, only one-half or
even less; so that the real value of one-half of the building said to be
sold, most likely, was, double P18,000, that is to say, P36,000, if not
more. It is hard to believe that this property was being sold for only
P5,500. Under the circumstances, it was perfectly valid and proper for
the prosecution to ask the offended party and alleged vendor, the
question objected to by the defense, and otherwise introduce parol
evidence to show that the real transaction and agreement between the
parties was not one of sale, but of loan, and that the interest charged
by the creditor was usurious; that a part of the amount of the loan of
P5,500 had been retained by him as advance interest; and that the
amount actually received by the borrower was only P3,000, and not
P5,500.

FIRST DIVISION
G.R. No. L-46307 October 9, 1985
PACIENCIA VIZCONDE SERRANO, petitioner,
vs.
HONORABLE COURT OF APPEALS, LEOCADIO MACARAYA and
MAXIMO C. FERNANDEZ, respondents.
Guillermo Jumamil and Tanjili Law Office for petitioner.
Gregorio Batiller for private respondent.

GUTIERREZ, JR., J.:

This is a case which involves the true nature of the purported contract
of sale executed by petitioner Paciencia Vizconde Serrano in favor of
private respondent Leocadio Macaraya.
The background tacts were summarized by the then Court of Appeals
as follows:
The litigated realty is more or less 384 square meters
situated in the municipality of Mati, Davao Province,
originally encompassed in plaintiff-appellee's TCT No. T-438
(Exh. D), then under lease, to expire last January 1971, with
one Lorenzo Tan, who subleased the same to the Angelo
Leonar Enterprises & Co., Inc., in actual possession thereof
for a monthly rental of P500.00.
On January 17, 1969, Mrs. Serrano executed a notarial
document (Exh. A) purporting to convey the said realty by
way of absolute sale to defendant Leocadio Macaraya for
the price of P12,000.00. In a separate private document of
even date (Exh. 1) Mrs. Serrano was given by Macaraya two
months therefrom to repurchase her property during which
period she was allowed to collect the monthly rentals.
Thereafter rentals were collected by Macaraya himself.(1.
tsn., 41-42).
Mrs. Serrano did not re-purchase The property in question
was burdened with unpaid taxes which had accumulated for
many years, and pending the determination of the exact
amount thereof by the Municipal Treasurer of Mati,
Macaraya had his ownership rights in TCT No. T-438 on
September 12, 1969 (Exhs. E & 2) of which fact Mrs.
Serrano was duly notified on even date (Exh. 2-A).
On September 29, 1969, Macaraya paid the tax arrearages
in its entirety, including surcharges, for the period of 11 years
from 1958 to 1969, inclusive, in the total amount of P 760.41
(Exh. 3). Thereafter, the sale to Macaraya was registered
and on October 3, 1969, TCT No. 15704 (Exh. F) was
consequently issued in his name.
On October 21, 1969, the Macaraya spouses, Leocadio and
Dorotea, jointly executed a deed of absolute sale (Exh. H) of
the said property to Maximo C, Fernandez, which transaction
was in effect one of (dacion en pago,) the P20,000.00
consideration therefor was applied as partial payment for the
Macaraya's outstanding indebtedness to the vendee
Fernandez who was consequently issued TCT No. T-15789
(Exh. G). There is now pending in the Municipal Court of
Mati, Davao Oriental ejectment case No. 366, lodged by
Maximo C. Fernandez against the lessee Angelo Leonar
Enterprises & Co. In the meantime that the present litigation
has not been resolved with finality the parties in the said
ejectment case agreed to have the monthly rentals
deposited as they fall due in the said municipal court.

On April 18, 1970, petitioner Serrano filed with the then Court of First
Instance of Davao Oriental, Branch X, a complaint against respondents
Leocadio Macaraya and Maximo Fernandez for declaration of nullity of
contract, cancellation of titles, reconveyance and damages. She
alleged that the contract of sale between her and Macaraya was
fictitious and simulated. She averred that it did not reflect their true
agreement, which was a mere transaction of loan in the amount of
P12,000.00. She further alleged that she actually received only
P10,000.00 and that the difference of P2,000.00 was added to the
consideration to conceal the usurious monthly interest of P1,000.00.
She claimed to be a victim of fraud perpetrated by Macaraya and
Fernandez.
On the other hand, respondents Macaraya and Fernandez denied the
imputation of fraud and insisted upon the regularity of the assailed
transactions. Fernandez, who never attended trial but sent his
deposition, claimed good faith in purchasing the property in question
and denied knowledge of any flaw in the title of Macaraya.
On May 29, 1971, the lower court rendered the following decision:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff, ordering:
l) Defendants to surrender to the Register Deeds of Davao
Oriental, Transfer Certificate of Title No. T-15789 in the
name of Maximo C. Fernandez;
2) The Register of Deeds of Davao Oriental to cancel
Transfer Certificate of Title T-15789 in the name of Maximo
C. Fernandez and to re-issue a new one in lieu thereof in the
name of PACIENCIA VIZCONDE SERRANO; and
3) Defendants to pay moral damages in the sum of
P2,000.00, attorney's fees in the sum of P1,000.00 and the
costs of the suit.
On appeal to the Court of Appeals, the trial court's decision was totally
reversed in the following manner:
IN VIEW OF ALL THE FOREGOING CONSIDERATIONS,
the decision appealed from is set aside and the complaint
dismissed. The title certificate TCT No. T-15789 of
defendant-appellant Maximo C. Fernandez is hereby
declared valid and consequently he is likewise declared the
absolute owner of the herein litigated property.
The Court of Appeals held that "the Deed of Sale" Identified as Exhibit
"A" is really a contract of sale with all the required legal formalities and
therefore has in its favor the presumption of regularity and nothing but
the most convincing evidence will prevail in order to overthrow its
probative value with respect to the transactions recorded therein." The
appellate court stated that even if Exhibit "A" is void, the property
subject of the conflict has been transferred to a third person, the other
defendant Maximo C. Fernandez, and, therefore, the nullity of Exhibit
"A", would be of no moment and cannot adversely affect the rights of
the said defendant-transferee.
On November 26, 1976, the petitioner filed a motion for
reconsideration and rehearing of the decision of the Court of Appeals.
The motion was denied in a resolution dated January 19, 1977. On
February 23, 1977, the petitioner filed with the same court a motion for
new trial based on newly discovered evidence which would prove that
respondent Fernandez was not a buyer in good faith. This motion was
denied by the Court of Appeals in its resolution dated April 19, 1977.
Petitioner Serrano went to this Court in a petition for certiorari with the
following assignments of errors:
I
THE HONORABLE COURT OF APPEALS
COMMITTED A GRAVE ERROR IN HOLDING
THAT EXHIBIT "A" WAS REALLY A CONTRACT
OF SALE WITHOUT CONSIDERING EXHIBIT "I"
AND OTHER CIRCUMSTANCES.
II
THE HONORABLE COURT OF APPEALS
ERRED IN NOT DECLARING THAT EXHIBIT "A"
TOGETHER WITH EXHIBIT "I" IS A PACTO DE
RETRO SALE AND CONSEQUENTLY ERRED IN

NOT
ALLOWING
PETITIONER
TO
REPURCHASE THE LITIGATED PROPERTY
ACCORDING TO LAW.
III
THE HONORABLE COURT OF APPEALS
ERRED
IN
CONSIDERING
DEPOSITION
(EXHIBIT 1, FERNANDEZ) IN ITS DECISION
CONTRARY TO LAW.
IV
THE HONORABLE COURT OF APPEALS
ERRED IN RULING THAT PRESUMPTION OF
GOOD FAITH WAS NOT OVERCOME BY
PETITIONER AND IN DECLARING THAT
RESPONDENT FERNANDEZ HAS A VALID
TITLE OVER THE LITIGATED PROPERTY.
V
THE HONORABLE COURT OF APPEALS
ERRED IN DENYING PETITIONER'S MOTION
FOR RECONSIDERATION AND REHEARING
AND THE SUBSEQUENT MOTION FOR NEW
TRIAL WITHOUT VALID GROUNDS STATED
THEREIN.
Even as respondents Macaraya and Fernandez urge this Court to
affirm the Court of Appeals decision on its merits, they raise as a
preliminary issue the timeliness of the filing of the petition. Our
examination of the records of this case shows that the arguments on
this issue have no merit.
We note that the respondents have deducted the number of days
between the petitioner's notice of the decision and the date she filed a
motion for reconsideration from the number of days given her to come
to us on a petition for review or to take such other action before
judgment becomes final and executory.
The respondents err in their mode of computing the period before
finality of judgment. Section I of Rule 45 of the Rules of Court gives a
party 15 days from the denial of a motion for reconsideration by the
appellate court to come to the Supreme Court. These 15 days do not
include the number of days that lapse from notice of judgment to the
filing of the motion for reconsideration. The 15-day period starts anew
from the notice of the motion's denial.
And even assuming that a petition for review is filed a few days late,
where strong considerations of substantial justice are manifest in the
petition, this Court may relax the stringent application of technical rules
in the exercise of our equity jurisdiction. In addition to the basic merits
of the main case, such a petition usually embodies justifying
circumstances which warrant our heeding the petitioner's cry for
justice, inspite of the earlier negligence of counsel.
It bears repeating that rules of procedure are not to be applied rigidly
(Tan v. Director of Forestry, 125 SCRA 302). In a number of cases, this
Court in the exercise of equity jurisdiction decided to disregard
technicalities in order to resolve the case on its merits based on the
evidence. (See St. Peter Memorial Park, Inc. v. Cleofas, 121 SCRA
287; Helmuth, Jr. v. People of the Philippines, 112 SCRA 573). As we
ruled in the case of Calasiao Farmers Cooperative Marketing
Association, Inc. v. Court of Appeals (106 SCRA 630, 637):
Dismissal of appeals based on purely technical grounds is
frowned upon as the policy of the Courts is to encourage
hearing of appeals on the merits. (Gregorio v. Court of
Appeals, 72 SCRA 120 [1976]) Rules of procedure, are
intended to promote, not to defeat substantial justice, and
therefore, they should not be applied in a very rigid and
technical sense.
In the case at bar, the conclusions of the Court of Appeals on factual
matters are contrary to those of the trial court. A minute scrutiny by this
Court is in order and resort to duly proven evidence becomes
necessary (Legaspi v. Court of Appeals, 69 SCRA 360, and Tolentino v.
De Jesus, 56 SCRA 167).
Was the contract entered into between petitioner Serrano and
respondent Macaraya an absolute sale as found by the Court of
Appeals or an equitable mortgage as alleged by the petitioner?

The records show that the contract between the parties was actually a
deed of sale pacto de retro which was made to appear as an absolute
deed of sale.
This Court has ruled in Shell Co. of the Phils. Ltd. v. Firemen's Ins. Co.
of Newark, N. J. et al. (100 Phil. 757.) that:
To determine the nature of a contract courts do not have or
are not bound to rely upon the name or title given it by the
contracting parties, should there be a controversy as to what
they really had intended to enter into, but the way the
contracting parties do or perform their respective obligations
stipulated or agreed upon may be shown and inquired into,
and should such performance conflict with the name or title
given the contract by the parties, the former must prevail
over the latter.
That a transaction was really one of loan with security, and therefore a
mortgage, may be shown by the aid of surrounding circumstances, and
parol evidence is competent in that respect. This rule has been
accepted for many generations. The difficulty lies in its application, for
many factors are to be considered, none of them conclusive in itself,
but each to be considered in its company. (1 Glenn, Mortgages, 59-60
[1943]).
In the instant case, the petitioner was made to execute a document
entitled "Deed of Absolute Sale" in favor of respondent Macaraya. On
the same date Macaraya executed an Undertaking" giving the vendor
the right to repurchase the lot within two months from date.
Significantly, the same Elpidia C. Lagura who signed as witness to the
deed of absolute sale was also a witness to the undertaking. As stated
in Capulong v. Court of Appeals (130 SCRA 245), the intent to
circumvent the Civil Code provision discouraging pacto de retro sales
is very apparent. In the Capulong case, we distinguished between
these types of contracts and the contract in Villarica v. Court of
Appeals (26 SCRA 189). We stated:
There is one important factor that differentiates the Villarica
case from the instant petition. The document granting the
vendors therein an option to buy back the property was
executed six (6) days after the execution of the deed of sale
whereas in the instant case the option to buy was embodied
in a document executed at the same time that the
questioned deed of sale was executed. The option to buy in
Villarica case was interpreted to be only an afterthought. On
the other hand, the intent of the parties to circumvent the
provision discouraging pacto de retro sales is very apparent
in the instant case. The two contracts, the deed of sale and
the document embodying the option to repurchase were
prepared, signed, and notarized on the same day. The
respondent court should have seen through a transparent
effort to make it appear that the two transactions were not
intimately related but distinct and separate as in the Villarica
case. This should have put the court on guard considering
the other circumstances of the case from which no other
conclusion could be derived except that the deed of absolute
sale and the document giving the right to repurchase were,
in fact, only one transaction of sale pacto de retro which
must be construed as an equitable mortgage. ...
Since the sale of the lot was one of pacto de retro, the question before
us now is whether or not it should be treated as an equitable mortgage.
The Civil Code provides:
ART. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the
thing sold;

(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any
other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws.
ART. 1603. In case of doubt, a contract purporting to be a
sale with right to repurchase shall be construed as an
equitable mortgage.
ART. 1604. The provisions of article l602 shall also apply to a
contract purporting to be an absolute sale.
We find the amount of P12,000.00 inadequate for a 384 square meter
lot in the poblacion of Mati, Davao which the trial court found to be "a
very valuable piece of commercial property." This conclusion is
supported by the fact that barely ten months after the questioned
transaction between the petitioner and respondent Macaraya, it was
transferred to respondent Fernandez (Exhibit H) who admitted that it
was good bargain, for a consideration of P20,000.00, The records also
show that on June 2, 1970 or another seven months later, (Exhibit "4"),
the Angelo Leonar Enterprises, Inc. offered to respondent Macaraya
their willingness to purchase the same lot for P30,000.00. There was
no showing of any reasons why the value of the lot appreciated so
rapidly. What was admitted in the pleadings and testimonies of both
parties was the fact that petitioner Serrano "needed the money." In
Labasan v. Lacuesta (86 SCRA 16), this Court quoted the Lord
Chancellor in Vernon v. Bethell (2 Eden. 13) thus: Necessitous men
are not, truly speaking, free men; but to answer a present emergency,
will submit to any terms that the crafty may impose upon them."
In the trial proceedings below, we also note that respondent Macaraya
had not been consistent in rebutting the allegation that the petitioner
had paid him P1,000.00 monthly as interest for the amount loaned.
It was also admitted by respondent Macaraya that petitioner Serrano
continued receiving rentals from Angelo Leonar Enterprises, Inc., the
lessee of the subject property for at least six months after the
execution of the contract of sale dated January 17, 1969 (2 tsn. p. 24).
The collection of rentals ceased only when respondent Fernandez
sued the lessee for ejectment and the rentals were subsequently
ordered to be deposited in the municipal court of Mati pending the
resolution of this case. This Court finds it strange that respondent,
Macaraya would allow petitioner Serrano to receive the fruits of the
subject property several months after he acquired absolute ownership
of the same. This is contrary to the principle of ownership. As of the
filing of the petition and presumably up to the present, the petitioner
and supposed vendor in an absolute sale has retained possession of
the disputed property.
The last issue refers to the petitioner's allegations that respondent
Maximo C. Fernandez was not a purchaser in good faith.
The trial court stated in its decision that it had serious doubts on the
authenticity of the deed of sale executed by Macaraya in favor of his
co-respondent Maximo C. Fernandez. The appellate court, however,
brushed aside the contentions that Fernandez was a mere dummy in a
simulated sale and ruled that the presumption of good faith was not
overcome by clear cut and positive evidence to the contrary.
We sustain the factual finding of the trial court.
The trial court emphasized in its decision that the supposed buyer in
good faith and current owner never showed the slightest interest in the
litigation involving the cancellation of his title and the reversion of the
lot he purchased from Macaraya to the original vendor. The court
stated:
It was the defendant Macaraya, who has from the inception
of this case, manifested intense interest in the outcome of
the same so much so that no one will doubt that he is indeed
and truly the owner of the lot in question.
Fernandez did not appear at the trial. His deposition taken in Cebu City
at the Macaraya Building, Colon Street was introduced in evidence by
the respondents. Fernandez admitted that he has never been to Mati,
Davao Oriental and he has never seen the lot sold to him by
Macaraya. He lives in San Roque, Talisay, Cebu. He never bothered to
find out what was sold to him for P20,000.00 in 1969, whether or not

the land was really worth that much or that it even existed. Maximo C.
Fernandez was then a 64-year old man who worked as a tailor for a
living.
Republic of the Philippines
SUPREME COURT
Manila

The records show that the deed of sale was executed by petitioner
Serrano in favor of Macaraya on January 17, 1969. It took Macaraya
until October 3, 1969 to have the transfer certificate of title T-15704
registered in his name.
The deed of sale in favor of Fernandez was executed in Cebu City on
October 21, 1969. Two days later, October 23, 1969, the new title, TCT
No. 15704 was already registered in the Registry of Davao in the name
of Fernandez, who was all the time in Cebu.
It is also highly unusual that the transaction between Macaraya and
Fernandez involved no transfer of money. The sale was allegedly one
of dacion en pago. The Macarayas, who appear to be well to do, "sold"
the P20,000.00 lot to Fernandez, a poor tailor, as "partial payment" for
the Macaraya's outstanding indebtedness to the vendee.
The fifth assignment of error questions the respondent court's denial of
the petitioner's motion for rehearing or new trial. The petitioner wanted
to introduce into the records the certification of the Talisay, Cebu
treasurer that respondent Fernandez has no property listed in his
name in that municipality and the certification of the Bureau of Internal
Revenue Regional Director for Central Visayas that respondent
Fernandez did not file any income tax returns for the years 1968
through 1972.
We see no need to pass upon this issue. There is more than enough
evidence in the records to affirm the trial court's finding that Fernandez
was not a buyer in good faith.
WHEREFORE, the petition is hereby GRANTED. The decision of the
Court of Appeals is REVERSED and SET ASIDE. The contract
between the petitioner and Leocadio Macaraya being one of equitable
mortgage, Transfer Certificate of Title No. T-15789 in the name of
Maximo C. Fernandez is ordered CANCELLED and a new one issued
in the petitioner's name.
SO ORDERED.

SECOND DIVISION
G.R. No. 42108 December 29, 1989
OSCAR D. RAMOS and LUZ AGUDO, petitioners,
vs.
HON. COURT OF APPEALS, ADELAIDA RAMOS and LAZARO E.
MENESES, respodents.
Godofredo V. Magbiray for petitioners.
Joselito Lim for private respondents.

REGALADO, J.:
The instant petition for review on certiorari impugns the decision of the
Court of Appeals dated October 7, 1975, 1 which affirmed in toto the
decision of the Court of First Instance of Tarlac in Civil Case No. 4168,
entitled "Adelaida Ramos, et al. vs. Oscar D. Ramos, et al.," holding
that the contracts between the parties are not ventas con pacto de
retro but are equitable mortgages.
Sometime in January 1959, private respondent Adelaida Ramos
borrowed from her brother, petitioner Oscar D. Ramos, the amounts of
P 5,000.00 and P 9,000.00 in connection with her business transaction
with one Flor Ramiro, Fred Naboa and Atty. Ruperto Sarandi involving
the recovery of a parcel of land in Tenejeros, Malabon. The said
amount was used to finance the trip to Hawaii of Ramiro, Naboa and
Atty. Sarandi. As security for said loan, private respondent Adelaida
Ramos executed in favor of petitioners two (2) deeds of conditional
sale dated May 27, 1959 and August 30, 1959, of her rights, shares,
interests and participation respectively over Lot No. 4033 covered by
Original Certificate of Title No. 5125 registered in the name of their
parents, Valente Ramos and Margarita Denoga, now deceased; 2 and
Lot No. 4221 covered by Transfer Certificate of Title No. 10788 then
registered in the names of Socorro Ramos, Josefina Ramos and
Adelaida Ramos, 3 said properties being of the Cadastral Survey of
Paniqui, Tarlac.
Upon the failure of said private respondent as vendor a retro to
exercise her right of repurchase within the redemption period,
aforenamed petitioner filed a petition for consolidation and approval of
the conditional sale of Lot No. 4033 in Special Proceedings No. 5174,
entitled "Intestate Estate of the late Margarita Denoga," 4 and a petition
for approval of the pacto de retro sale of Lot No. 4221 in the former
Court of First Instance of Tarlac acting as a cadastral court. 5 On
January 22, 1960, the said probate court issued an order with the
following disposition:
WHEREFORE, the deed of CONDITIONAL SALE executed
on May 27, 1959, by Adelaida Ramos in favor of spouses
Oscar D. Ramos and Luz Agudo, conveying to the latter by
way of pacto de retro sale whatever rights and interests the
former may have in Lot No. 4033 of the Cadastral Survey of
Paniqui, which deed of conditional sale is known as
Document No. 14, Page 26, Book VI, Series of 1959, of the
notarial register of Notary Public Jose P. Sibal, is hereby
approved. 6
The cadastral Court also issued a similar order dated April 18, 1960,
the dispositive portion of which reads:
WHEREFORE, by way of granting the petition, the Court
orders the consolidation of ownership and dominion in
petitioners-spouses Oscar D. Ramos and Luz Agudo over
the rights, shares and interests of Adelaida Ramos in Lot No.
4221 of the Cadastral Survey of Paniqui, Tarlac, which the
latter sold to the former under a pacto de retro sale executed
in a public instrument known as Document No. 22, Page 28,
Book No. VI. Series of 1959, of the Notarial Registry of
Notary Public Jose P. Sibal but which she failed to
repurchase within the period specified in said Document. 7

Private respondents had been and remained in possession of these

properties until sometime in 1964 when petitioner took possession
thereof.
On February 28, 1968, private respondent filed Civil Case No. 4168
with the then Court of First Instance of Tarlac for declaration of nullity
of orders, reformation of instrument, recovery of possession with
preliminary injunction and damages. The complaint therein alleged that
the deeds of conditional sale, dated May 27, 1959 and August 30,
1959, are mere mortgages and were vitiated by misrepresentation,
fraud and undue influence and that the orders dated January 22, 1960
and April 18, 1960, respectively issued by the probate and cadastral
courts, were null and void for lack of jurisdiction. Petitioners, in their
answer to the complaint, specifically deny the allegations of fraud and
misrepresentation and interposed as defense the fact that the
questioned conditional sales of May 27, 1959 and August 30, 1959
were voluntarily executed by private respondent Adelaida Ramos and
truly expressed the intention of the parties; that the action, if any, has
long prescribed; that the questioned orders of January 22, 1960 and
April 18, 1960, approving the consolidation of ownership of the lands in
question in favor of petitioner were within the jurisdiction of the lower
court, in its capacity as a probate court insofar as Lot No. 4033 is
concerned, and acting as a cadastral court with respect to Lot No.
4221; and that said lands subject of the conditional sales were in
custodia legis in connection with the settlement of the properties of the
late Margarita Denoga, the predecessor in interest of both petitioners
and private respondents.
On January 7, 1970, the court below issued a pre-trial order to the
effect that petitioners admit the genuineness and due execution of the
promissory notes marked as Exhibits "F" and "F-1 " and that the
principal triable issue is whether or not the documents purporting to be
deeds of conditional sale, marked as Exhibits "B", "B-1" and "G" were
in fact intended to be equitable mortgages. 8 In its order dated
February 17, 1971, the trial court also declared: "Both parties agreed
and manifested in open court the principal obligation in the transaction
reflected in Exhibits 'B' and 'B-l' and 'G' is one of loan. The parties
differ, however, on the nature of the security described therein. 9
On May 17, 1971, the court a quo rendered a decision the decretal part
of which reads:
WHEREFORE, judgment is hereby rendered:
1) Denying defendants' motion
dismiss of February 23, 1970;

to

2) Declaring Exhibits 'B', 'B-I' and 'G' as

loan transaction secured by real estate
mortgages;
3) Annulling and setting aside Exhibits
'D', 'D-l', 'I', 'I-l' and 'I-2';
4) Ordering plaintiffs, jointly and
severally to pay (within ninety [90] days
from receipt of a copy of this judgment)
defendants the sum of P 5,000.00
specified in Exhibit 'B', with interest
thereon at the legal rate from November
28, 1959 until full payment together with
the sum of P 9,308.00 specified in
Exhibit 'G' with interest thereon at the
legal rate from December 1, 1959 until
full payment, and in default of such
payment, let the properties mortgaged
under Exhibits 'B', 'B-1' and 'G' be sold
to realize the mortgage debt and costs;
and
5) Dismissing defendants' counter-claim.
With costs against defendants. 10
On June 14, 1971, petitioners appealed said decision to the Court of
Appeals which, on October 7, 1975; affirmed in all respects the
judgment of the trial court. Petitioners' motion for reconsideration of
said decision was denied on November 27, 1975. 11
On January 8, 1976, petitioners filed the petition at bar anchored on
the following assignments of errors:

1. The Hon. Court of Appeals erred in

not applying the correct provisions of
law interpreting the conditional sales
dated May 27, 1959 and August 30,
1959, Exhibits 'B' and 'G' as equitable
mortgages.
2. That as a consequence of its ruling
that the conditional sales, Exhibits 'B'
and 'G', are equitable mortgages, the
Hon. Court of Appeals erred in ordering
the reformation of the same.
3. The Honorable Court of Appeals erred
in holding that the order dated January
22, 1960, Exhibit C or 2, and the order
dated April 18, 1960, Exhibit H or 6,
issued by the probate court in Sp. Proc.
No. 5174 and by the cadastral court in
G.L.R.O. Rec. No. 395, respectively, are
null and void for lack of jurisdiction.
4. The Hon. Court of Appeals erred in
not applying the applicable provisions of
law on the prescription of action and in
not dismissing the complaint filed in the
lower court. 12
We find the petition devoid of merit.
Article 1602 of the Civil Code provides:
The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(1) When the price of a sale with right to
repurchase is unusually inadequate;
(2) When the vendor remains
possession as lessee or otherwise;

in

(3) When upon or after the expiration of

the right to repurchase another
instrument extending the period of
redemption or granting a new period is
executed;
(4) When the purchaser retains for
himself a part of the purchase price;
(5) When the vendor binds himself to
pay the taxes on the thing sold;
(6) In any other case where it may be
fairly inferred that the real intention of
the parties is that the transaction shall
secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits or other
benefit to be received by the vendee as rent or otherwise
shall be considered as interest which shall be subject to the
usury laws.
The Court of Appeals, in holding that the two (2) deeds purporting to be
pacto de retro sale contracts are equitable mortgages, relied on the
following factual findings of the trial court, to wit:
Several undisputed circumstances persuade this Court (that)
the questioned deeds should be construed as equitable
mortgages as contemplated in Article 1602 of the Civil Code,
namely: (1) plaintiff vendor remained in possession until
1964 of the properties she allegedly sold in 1959 to
defendants; (2) the sums representing the alleged purchase
price were actually advanced to plaintiff by way of loans, as
expressly admitted by the parties at the hearing of February
17, 1971, reflected in an Order of the same date: and (3) the
properties allegedly purchased by defendant Oscar Ramos
and his wife have never been declared for taxation purposes
in their names. Exhibits K, K-1, L and L-1. 13
Even if we indulge the petitioners in their contention that they are
justified in not taking possession of the lots considering that what were

allegedly sold to them were only the rights, shares, interests and
participation of private respondent Adelaida Ramos in the said lots
which were under administration, 14 however, such fact will not justify a
reversal of the conclusion reached by respondent court that the
purported deeds of sale con pacto de retro are equitable mortgages.
Such a conclusion is buttressed by the other circumstances catalogued
by respondent court especially the undisputed fact that the two deeds
were executed by reason of the loan extended by petitioner Oscar
Ramos to private respondent Adelaida Ramos and that the purchase
price stated therein was the amount of the loan itself.
The above-stated circumstances are more than sufficient to show that
the true intention of the parties is that the transaction shall secure the
payment of said debt and, therefore, shall be presumed to be an
equitable mortgage under Paragraph 6 of Article 1602 hereinbefore
quoted. Settled is the rule that to create the presumption enunciated by
Article 1602, the existence of one circumstance is enough. 15 The said
article expressly provides therefor "in any of the following cases,"
hence the existence of any of the circumstances enumerated therein,
not a concurrence nor an overwhelming number of such
circumstances, suffices to give rise to the presumption that the contract
with the right of repurchase is an equitable mortgage. As aptly stated
by the Court of Appeals:
Thus, it may be fairly inferred that the real intention of the
parties is that the transactions in question were entered into
to secure the payment of the loan and not to sell the property
(Article 1602, Civil Code). Under Article 1603 of the Civil
Code it is provided that 'in case of doubt, a contract
purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage' in this case, we have
no doubt that the transaction between the parties is that of a
loan secured by said properties by way of mortgage. Hence,
we find that Exhibits B and G do not reflect the true and real
intention of the parties and should accordingly be reformed
and construed as equitable mortgages. 16
Equally puerile is the other contention of petitioners that respondent
court erred in not applying the exclusionary parol evidence rule in
ascertaining the true intendment of the contracting parties. The present
case falls squarely under one of the exceptions to said rule as provided
in then Section 7 of Rule 130, thus:
xxx xxx xxx
(a) Where a mistake or imperfection of
the writing or its failure to express the
true intent and agreement of the parties,
or the validity of the agreement is put in
issue by the pleadings; 17
xxx xxx xxx
Moreover, it is a well entrenched principle in the interpretation of
contracts that if the terms thereof are clear and leave no doubt as to
the intention of the contracting parties the literal meaning of the
stipulation shall control but when the words appear to be contrary to
the evident intention of the parties, the latter shall prevail over the
former. 18
The admission of parol testimony to prove that a deed, absolute in
form, was in fact given and accepted as a mortgage does not violate
the rule against the admission of oral evidence to vary or contradict the
terms of a written instrument. 19 Sales with a right to repurchase, as
defined by the Civil Code, are not favored. We will not construe
instruments to be sales with a right to repurchase, with the stringent
and onerous effects which follow, unless the terms of the document
and the surrounding circumstances require it. Whenever, under the
terms of the writing, any other construction can fairly and reasonably
be made, such construction will be adopted and the contract will be
construed as a mere loan unless the court can see that, if enforced
according to its terms, it is not an unconscionable one. 20
On the faces thereof, the contracts purport to be sales with pacto de
retro; however, since the same were actually executed in consideration
of the aforesaid loans said contracts are indubitably equitable
mortgages. The rule is firmly settled that whenever it is clearly shown
that a deed of sale with pacto de retro, regular on its face, is given as
security for a loan, it must be regarded as an equitable mortgage. 21

With respect to the orders dated January 22, 1960 and April 18, 1960,
issued by the Court below acting as a probate court and cadastral
court, respectively, the same could not preclude the institution of the
case now under review.
A reading of the order of the probate court will show that it is merely an
approval of the deed of conditional sale dated May 27, 1959 executed
by petitioner Adelaida Ramos in favor of petitioners. There is nothing in
said order providing for the consolidation of ownership over the lots
allegedly sold to petitioners nor was the issue of the validity of said
contract discussed or resolved therein. "To give approval" means in its
essential and most obvious meaning, to confirm, ratify, sanction or
consent to some act or thing done by another. 22 The approval of the
probate court of the conditional sale is not a conclusive determination
of the intrinsic or extrinsic validity of the contract but a mere recognition
of the right of private respondent Adelaida Ramos as an heir, to
dispose of her rights and interests over her inheritance even before
partition. 23 As held in Duran, et al., vs. Duran 24 the approval by the
settlement court of the assignment pendente lite, made by one heir in
favor of the other during the course of the settlement proceedings, is
not deemed final until the estate is closed and said order can still be
vacated, hence the assigning heir remains an interested person in the
proceeding even after said approval.
Moreover, the probate jurisdiction of the former court of first instance or
the present regional trial court relates only to matters having to do with
the settlement of the estate and probate of wills of deceased persons,
and the appointment and removal of administrators, executors,
guardians and trustees. Subject to settled exceptions not present in
this case, the law does not extend the jurisdiction of a probate court to
the determination of questions of ownership that arise during the
proceeding. The parties concerned may choose to bring a separate
action as a matter of convenience in the preparation or presentation of
evidence. 25 Obviously, the approval by the probate court of the
conditional sale was without prejudice to the filing of the proper action
for consolidation of ownership and/or reformation of instrument in the
proper court within the statutory period of prescription.
The same jurisdictional flaw obtains in the order of consolidation
issued by the cadastral court. The court of first instance or the regional
trial court, acting as cadastral court, acts with limited competence. It
has no jurisdiction to take cognizance of an action for consolidation of
ownership, much less to issue an order to that effect, such action must
have been filed in the former court of first instance, now in the regional
trial court, in the exercise of its general jurisdiction. That remedy, and
the procedure therefor, is now governed by Rule 64 of the Rules of
Court as a special civil action cognizable by the regional trial court in
the exercise of original general jurisdiction.
Antecedent thereto, Article 1607 of the Civil Code provided for
consolidation as follows:
In case of real property, the consolidation of ownership in the
vendee by virtue of the failure of the vendor to comply with
the provisions of article 1616 shall not be recorded in the
Registry of Property without a judicial order, after the vendor
has been duly heard.
Hence in Crisologo, et al. vs. Centeno, et al., 26 we ruled that said
Article 1607 contemplates a contentious proceeding wherein the
vendor a retro must be named respondent in the caption and title of the
petition for consolidation of ownership and duly summoned and heard.
An order granting the vendee's petition for consolidation of ownership,
without the vendor a retro being named as respondent, summoned and
heard, is a patent nullity for want of jurisdiction of the court over the
person of the latter.
The questioned order of consolidation issued by the cadastral court,
being void for lack of jurisdiction, is in contemplation of law nonexistent and may be wholly disregarded. Such judgment may be
assailed any time, either directly or collaterally, by means of a separate
action or by resisting such judgment in any action or proceeding
whenever it is invoked. 27 It is not necessary to take any step to vacate
or avoid a void judgment; it may simply be ignored. 28
On the issue of prescription, in addition to what has been said, the
present case, having been filed on February 28, 1960, approximately
seven (7) years from the execution of the questioned deeds, was
seasonably instituted. The prescriptive period for actions based upon a
written contract and for reformation is ten (10) years under Article 1144

of the Civil Code. Such right to reformation is expressly recognized in

Article 1365 of the same code. 29
Article 1602 of the Civil Code is designed primarily to curtail the evils
brought about by contracts of sale with right of repurchase, such as the
circumvention of the laws against usury and pactum commissorium. 30
In the present case before us, to rule otherwise would contravene the
legislative intent to accord the vendor a retro maximum safeguards for
the protection of his legal rights under the true agreement of the
parties. The judicial experience in cases of this nature and the
rationale for the remedial legislation are worth reiterating, considering
that such nefarious practices still persist:
It must be admitted that there are some cases where the
parties really intend a sale with right to repurchase. Although
such cases are rare, still the freedom of contract must be
maintained and respected. Therefore, the contract under
consideration is preserved, but with adequate safeguards
and restrictions.
One of the gravest problems that must be solved is that
raised by the contract of sale with right of repurchase or
pacto de retro. The evils arising from this contract have
festered like a sore on the body politic. ...
xxx xxx xxx
It is a matter of common knowledge that in practically all of
the so-called contracts of sale with right of repurchase, the
real intention of the parties is that the pretended purchaseprice is money loaned, and in order to secure the payment of
the loan a contract purporting to be a sale with pacto de retro
is drawn up. It is thus that the provisions contained in articles
1859 and 1858 of the present Civil Code which respectively
prohibit the creditor from appropriating the things given in
pledge or mortgage and ordering that said things be sold or
alienated when the principal obligation becomes due, are
circumvented.
Furthermore, it is well-known that the practice in these socalled contracts of sale with pacto de retro is to draw up
another contract purporting to be a lease of the property to
the supposed vendor, who pays in money or in crops a socalled rent. It is, however, no secret to anyone that this
simulated rent is in truth and in fact interest on the money
loaned. In many instances, the interest is usurious. Thus, the
usury law is also circumvented.
It is high time these transgressions of the law were stopped.
It is believed by the Commission that the plan submitted for
the solution of the problem will meet with the approval of an
enlightened public opinion, and in general, of everyone
moved by a sense of justice.
During the deliberations of the Commission the question
arose as to whether the contract of purchase with pacto de
retro should be abolished and forbidden. On first impression,
this should be done, but there is every reason to fear that in
such a case the usurious money-lenders would demand of
the borrowers that, although the real agreement is one of
loan secured with a mortgage, the instrument to be signed
should purport to be an absolute sale of the property
involved. Should this happen, the problem would become
aggravated. Moreover, it must be admitted that there are
some cases where the parties really intend a sale with right
to repurchase. Although such cases are rare, still the
freedom of contract must be maintained and respected.
Therefore, the contract under consideration is preserved in
the Project of Civil Code, but with adequate safeguards and
restrictions. 31
WHEREFORE, the instant petition is hereby DENIED and the assailed
decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 146730

July 4, 2008

AMADO Z. AYSON, JR., petitioner,

vs.
SPOUSES FELIX and MAXIMA PARAGAS, respondents.
DECISION

NACHURA, J.:
For review on certiorari under Rule 45 of the Rules of Court are the
Decision1 dated May 31, 2000 and the Resolution2 dated
December 12, 2000 of the Court of Appeals in CA-G.R. CV No.
59645.
The subject of this controversy is the one-fourth (1/4) portion of,
corresponding to the share of respondent Maxima Paragas in, the
real property located at Caranglaan District, Dagupan City,
originally covered by Transfer Certificate of Title No. 7316 of the
Register of Deeds of Dagupan City.
The controversy commenced with the filing of an ejectment
complaint3 on April 12, 1993 before Branch 1 of the Municipal Trial
Court in Cities (MTCC) of Dagupan City by herein petitioner
Amado Z. Ayson, as represented by his natural father Zosimo S.
Zareno4 (Zareno), against respondent-spouses Felix and Maxima
Paragas. The complaint, docketed as Civil Case No. 9161,
alleged, among others, that: (1) petitioner is the registered owner
of the property being occupied by the respondent-spouses as
shown by Transfer Certificate of Title No. 59036 of the Registry of
Deeds of Dagupan City in his name; (2) respondent-spouses are
occupying the said land through his tolerance without rent; (3) on
April 8, 1992, respondent-spouses executed an Affidavit5 which
declared:
1. That we are occupants of a parcel of land (Lot 6595-A2) covered by Transfer Certificate of Title No. 57684
located at Caranglaan District, Dagupan City owned by
Amado Ll. Ayson;
2. That we occupy the said land by tolerance without
paying any rental whatsoever;
3. That we further agree to vacate the aforesaid land
within three (3) months from the date hereof and to
remove and transfer our house therefrom to another
place;
4. That in consideration of vacating the said parcel of
land the amount of Twenty Thousand Pesos
(P20,000.00) shall be paid to us; and, that the amount of
Ten Thousand Pesos (P10,000.00) shall be paid upon
signing of this affidavit and the balance of Ten Thousand
Pesos (P10,000.00) shall be paid upon removal of our
house on the third month from date hereof.

(4) despite the receipt of the P10,000.00 upon the execution of the
Affidavit, respondent-spouses refused to vacate the land as
agreed upon; and (5) despite demands, respondent-spouses still
refused to vacate, thus constraining him to file the complaint. Aside
from respondents vacating the land, petitioner prayed for the
return of the P10,000.00 he paid them; and the payment of
P10,000.00 actual damages, P10,000.00 exemplary damages,
P20,000.00 attorneys fees, and the costs.

3) Ordering defendant (respondent) Felix Paragas to

return or indemnify the plaintiff (petitioner) the amount of
P10,000.00 representing the sum received by him from
the plaintiff (petitioner) on April 8, 1992;
4) Other claims are denied for lack of merit.
With costs against the defendants.

In their Answer, respondent-spouses alleged that Zareno had no

personality and authority to file the case and the filing of the
complaint was made in bad faith.
During the preliminary conference, the following admissions were
made
By petitioner:
(1) That the defendants (respondent spouses)
had been in possession of the land in question
since 1930; and
(2) That the semi-concrete house of the
defendants (respondent spouses) stands on the
land in question.
By respondent spouses:
(1) That the defendant (respondent) Felix
Paragas had executed an affidavit on April 8,
1992 wherein he admitted that he is occupying
the land by tolerance of the plaintiff (petitioner)
without paying any rental whatsoever and had
agreed to vacate the premises within three (3)
months but refused to vacate later;
(2) That the plaintiff (petitioner) is the registered
owner of the land in question;
(3) That there was a demand to vacate the
premises; and
(4) That there is a Certification to File Action in
Court.7
On August 31, 1993, the MTCC, Branch 1, Dagupan City decided
in favor of petitioner, based mainly on the above admissions,
rendering judgment as follows:
WHEREFORE, the preponderance of evidence being in
favor of the plaintiff (petitioner), judgment is hereby
rendered:
1) Ordering the defendants (respondent spouses) to
vacate the land in question located at Caranglaan
District, Dagupan City and covered by Transfer
Certificate of Title No. 59036 of the Registry of Deeds for
the City of Dagupan, and to deliver the physical and
peaceful possession to the plaintiff (petitioner);
2) Ordering the defendants (respondent spouses) jointly
and severally to pay the plaintiff (petitioner) the sum of
P300.00 as monthly rental of the land from the date of
the filing of the complaint until the defendants
(respondent spouses) vacate the premises;

SO ORDERED.8
Respondent-spouses appealed the said Decision to the Regional
Trial Court (RTC) of Dagupan City. In the Decision9 dated August
16, 1996, the RTC affirmed the MTCC Decision, the dispositive
portion of which reads
WHEREFORE, the appeal interposed by the appellants
is hereby DISMISSED. Judgment is rendered in favor of
the plaintiff (petitioner) and against the defendants
(respondent spouses), to wit:
1. ORDERING defendants (respondent spouses), their
agents, representatives and assigns to vacate the land
subject matter of this case;
2. ORDERING defendants (respondent spouses) to
return to the plaintiff (petitioner) the amount of
P10,000.00 received by them in consideration of their
promise to vacate the land subject matter of this case;
3. ORDERING defendants (respondent spouses) to pay
to the plaintiff (petitioner) P10,000.00 in actual damages;
P10,000.00 in exemplary damages; and P20,000.00 in
attorneys fees; and
4. ORDERING defendants to pay the costs.
SO ORDERED.10
Respondent-spouses went to the Court of Appeals via a petition for
review. In its Decision11 dated October 13, 1997, the appellate
court dismissed the petition. The Decision was appealed to this
Court. We denied the appeal in a Resolution dated December 3,
1997, on the basis of the failure of respondent-spouses to show
any reversible error in the decisions of the three courts below. Our
Resolution became final and executory on January 29, 1998 and
was entered in the Book of Entries of Judgments.12
Meanwhile, on October 11, 1993, during the pendency of the
appeal with the RTC, respondent-spouses filed against petitioner,
as represented by his attorney-in-fact Zosimo S. Zareno, the heirs
of Blas F. Rayos, the spouses Delfin and Gloria Alog, and Hon.
Judge George M. Mejia, as Presiding Judge of the Metropolitan
Trial Court, Branch 1 of Dagupan City, also before the RTC of
Dagupan City, a complaint13 for declaration of nullity of deed of
sale, transactions, documents and titles with a prayer for
preliminary injunction and damages. The complaint was docketed
as Civil Case No. D-10772 and was raffled to Branch 42.
The complaint alleged, inter alia, that respondent Maxima is a coowner of a parcel of land originally covered by TCT No. 7316 of the
Registry of Deeds of Dagupan City, her share having an area of
435.75 square meters. Sometime prior to April 13, 1955,
respondent Felix, then an employee of the defunct Dagupan
Colleges (now University of Pangasinan) failed to account for the
amount of P3,000.00. It was agreed that respondent Felix would
pay the said amount by installment to the Dagupan Colleges.
Pursuant to that agreement, Blas F. Rayos and Amado Ll. Ayson,

then both occupying high positions in the said institution, required

respondent-spouses to sign, without explaining to them, a Deed of
Absolute Sale on April 13, 1955 over respondent Maximas real
property under threat that respondent Felix would be incarcerated
for misappropriation if they refused to do so.

1. Annulling the Deed of Sale executed by Felix Paragas

and Maxima Paragas on April 13, 1955 (Exh. 3) in favor
of defendants Blas F. Rayos and Amado Ll. Ayson except
as it affects the interest of Spouses Delfin and Gloria
Alog over the property in question;

The complaint further alleged that later, respondent-spouses, true

to their promise to reimburse the defalcated amount, took pains to
pay their obligation in installments regularly deducted from the
salaries received by respondent Felix from Dagupan Colleges; that
the payments totaled P5,791.69; that notwithstanding the full
payment of the obligation, Amado Ll. Ayson and Blas F. Rayos did
nothing to cancel the purported Deed of Absolute Sale; and that
they were shocked when they received a copy of the complaint for
ejectment filed by petitioner.

2. Annulling likewise TCT No. 57684 issued to Amado Ll.

Ayson and TCT No. 59036 issued to Amado Z. Ayson,
including the respective tax declarations thereof;

During the pre-trial, the following was established

[T] he land in question was a portion of a larger lot
covered by TCT No. 41021 with an area of 1,743 square
meters in the name of Buenaventura Marias, father of
the plaintiff (respondent) Maxima Marias-Paragas.
Transfer Certificate of Title No. 41021 was later on
cancelled and replaced by TCT No. 7316 in the names of
Maxima Marias, Rufino Marias, Rizalina Marias and
Buenaventura Marias, specifying that each would
receive one-fourth (1/4) thereof. The portion pertaining to
Maxima Marias-Paragas was later on allegedly
conveyed to Blas F. Rayos and Amado Ll. Ayson by
virtue of a Deed of Sale allegedly executed on April 13,
1955 by Maxima Marias-Paragas with the conformity of
her husband Felix Paragas, after which TCT 7354 was
issued canceling TCT No. 7316. Under TCT No. 7354,
the new owners were Blas F. Rayos and Amado Ll.
Ayson, Rufino Marias, Rizalina Marias and Angela
Marias. The land was subdivided later on into four (4)
lots, distributed as follows: Lot A went to Blas F. Rayos
and Amado Ll. Ayson, Lot B to Rufino Marias, Lot C to
Rizalina Marias, and Lot D to Angela Marias. Each lot
has an area of 435.75 square meters. For Lot A, TCT No.
22697 was issued in the name of both Blas F. Rayos and
Amado Ll. Ayson.
On November 15, 1991, Lot A was the subject of a
subdivision between Amado Ll. Ayson and Blas F. Rayos.
Said subdivision was approved on December 10, 1991,
dividing the property into equal halves, each half with an
area of 217.88 square meters. Thereafter, the one-half
(1/2) pertaining to Blas F. Rayos was sold by his
successors-in-interest to spouses Delfin and Gloria Alog
by virtue of an Extra-Judicial Settlement With Sale dated
January 10, 1992, to which the said spouses were issued
TCT 57683 on January 14, 1992. On the same day,
Amado Ll. Ayson for his portion of the property was also
issued TCT 57684. Amado Ll. Ayson later passed on
ownership of his share to Amado Z. Ayson and issued to
the latter was TCT 59036 after the latter executed an
Affidavit of Self Adjudication dated August 3, 1992 upon
the death of Amado Ll. Ayson.14
After trial on the merits, the RTC, Branch 42, Dagupan City
rendered its Decision15 dated March 6, 1998 in favor of
respondent-spouses declaring the Deed of Absolute Sale as an
equitable mortgage, the decretal portion of which reads
WHEREFORE, judgment is hereby rendered in favor of
the plaintiffs and against the defendants, except the
spouses Delfin and Gloria Alog:

3. Ordering Amado Z. Ayson to reconvey ownership of

the property covered by TCT No. 59036 to the herein
plaintiffs, the true owners thereof;
4. Ordering defendant Amado Z. Ayson and the estate of
Blas F. Rayos to pay jointly and severally to the herein
plaintiffs the amount paid by Spouses Delfin and Gloria
Alog to the late Blas F. Rayos, there being no proof
adduced by the plaintiffs as to the actual current market
value of the said property;
5. Ordering the said defendants Amado Z. Ayson and the
estate of Blas F. Rayos to pay jointly and severally to the
plaintiffs other amounts of P50,000.00 as moral damages
and P10,000.00 as attorneys fees, including appearance
fee;
6. Further ordering the aforementioned defendants,
except defendant-spouses Delfin and Gloria Alog, to pay
costs.
SO ORDERED.16
Petitioner appealed the said Decision to the Court of Appeals,
which affirmed the same in its Decision dated May 31, 2000. The
motion for reconsideration filed by petitioner was likewise denied
by the Court of Appeals in its Resolution dated December 12,
2000. Hence, this petition raising the sole issue that
The Honorable Court of Appeals has acted in excess of
or with grave abuse of discretion amounting to lack of
jurisdiction in dismissing the appeal of the herein
petitioner Amado Z. Ayson, Jr. and in affirming the
decision of the Regional Trial Court, Branch 42, Dagupan
City in Civil Case No. D-10772, in violation of the laws on
sale, equitable mortgage, prescription, laches and
estoppel as well as the laws on property registration.17
Petitioner contends that respondent-spouses are bound by the
judicial admissions they made both in the ejectment case and in
the case for declaration of nullity of the Deed of Absolute Sale.
With respect to the ejectment case, he posits that respondentspouses cannot renege on the effects of their admissions that
petitioner is the registered owner of the disputed property; that
they were occupying the same by mere tolerance of the latter
without rent; and that they undertook to vacate the premises in
accordance with the Affidavit dated April 8, 1992, especially when
the findings of the MTCC had already become final upon the Entry
of Judgment of our Resolution affirming the MTCC, the RTC, and
the Court of Appeals.
As regards the action for declaration of nullity of the deed of
absolute sale, petitioner claims that respondent-spouses are
likewise bound by their admission during the pre-trial that the
series of certificates of title from the time the Deed of Absolute
Sale was registered with the Register of Deeds of Dagupan City
eventually led to the issuance of TCT No. 59036 in his name.

Petitioner further argues that the action instituted before the RTC,
Branch 42, Dagupan City has already prescribed. According to
him, the complaint alleged that the Deed of Absolute Sale was
executed through fraud, making the said contract merely voidable,
and the action to annul voidable contracts based on fraud
prescribed in four (4) years from the discovery of fraud. He insists
that the registration of the Deed of Absolute Sale occurred on May
4, 1955, which operated as constructive notice of the fraud to the
whole world, including respondent-spouses. Thus, petitioner
concludes that the action had long prescribed when they filed the
same on October 11, 1993, since its cause had accrued 38 years
ago.
Petitioner adds that respondent-spouses are bound by estoppel
and guilty of laches in light of the judicial admissions they have
already made and the unreasonable length of time that had lapsed
before they questioned the validity of the Deed of Absolute Sale
and the Affidavit they executed on April 8, 1992.
He also asseverates that the Deed of Absolute Sale is a true sale
and not an equitable mortgage, arguing that the alleged payments
made by respondent Felix were made from December 29, 1965 to
December 17, 1980, long after the execution of the contract on
April 13, 1955; that respondent-spouses only paid realty taxes over
their house and not on the disputed land; that their possession of
the property was by his mere tolerance; that there was no
evidence proffered that the amount of P3,000.00 as consideration
for the sale was unusually inadequate in 1955; and that the other
co-owners of the land did not question or protest the subdivision
thereof leading to the issuance of TCT No. 59036 in his name.
Lastly, petitioner claims that he is a transferee in good faith, having
had no notice of the infirmity affecting the title of his predecessor
Amado Ll. Ayson over the property. He says that he was only
exercising his right as an heir when he adjudicated unto himself
the parcel of land pertaining to his adoptive father, 18 resulting in the
issuance of TCT No. 59036 in his name, and, thus, should not be
penalized for his exercise of a legal right.
The arguments do not persuade.
First. With respect to the admissions made by respondentspouses, through their counsel during the preliminary conference
of the ejectment case, it is worthy to note that, as early as the
submission of position papers before the MTCC, they already
questioned the sale of the subject property to Amado Ll. Ayson and
Blas F. Rayos for being fictitious and asserted their ownership over
the land, pointing to the fact that respondent Maxima had been
living on the land since her birth in 1913 and that they had been in
continuous possession thereof since her marriage to respondent
Felix in 1944. However, unfortunately for them, the MTCC held
them bound by the admissions made by their counsel and decided
that petitioner had a better right to possess the property.
Nevertheless, it must be remembered that in ejectment suits the
issue to be resolved is merely the physical possession over the
property, i.e., possession de facto and not possession de jure,
independent of any claim of ownership set forth by the partylitigants.19 Should the defendant in an ejectment case raise the
defense of ownership in his pleadings and the question of
possession cannot be resolved without deciding the issue of
ownership, the issue of ownership shall be resolved only to
determine the issue of possession. 20 The judgment rendered in
such an action shall be conclusive only with respect to physical
possession and shall in no wise bind the title to the realty or
constitute a binding and conclusive adjudication of the merits on
the issue of ownership. Therefore, such judgment shall not bar an
action between the same parties respecting the title or ownership
over the property,21 which action was precisely resorted to by
respondent-spouses in this case.

Anent the claim that respondent-spouses admitted the series of

TCTs issued by reason of the registration of the questioned Deed
of Absolute Sale, suffice it to state that records show that they
admitted only the existence thereof, not necessarily the validity of
their issuance.
Second. The Deed of Absolute Sale is, in reality, an equitable
mortgage or a contract of loan secured by a mortgage. The Civil
Code enumerates the cases in which a contract, purporting to be a
sale, is considered only as a contract of loan secured by a
mortgage, viz.:
Art. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of the sale with
right to repurchase is unusually
inadequate;
(2) When the vendor remains in
possession as lessee or otherwise;
(3) When upon or after the expiration
of the right to repurchase another
instrument extending the period of
redemption or granting a new period
is executed;
(4) When the purchaser retains for
himself a part of the purchase price;
(5) When the vendor binds himself to
pay the taxes on the thing sold;
(6) In any other case where it may be
fairly inferred that the real intention of
the parties is that the transaction shall
secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other
benefit to be received by the vendee as rent or otherwise
shall be considered as interest which shall be subject to
the usury laws.22
Art. 1604. The provisions of article 1602 shall also apply
to a contract purporting to be an absolute sale.
In such cases, parol evidence then becomes competent and
admissible to prove that the instrument was in truth and in fact
given merely as a security for the repayment of a loan; and upon
adequate proof of the truth of such allegations, the courts will
enforce the agreement or understanding in this regard, in accord
with the true intent of the parties at the time the contract was
executed, even if the conveyance was accompanied by
registration in the name of the transferee and the issuance of a
new certificate of title in his name.23
In this case, the evidence before the RTC, Branch 42, Dagupan
City had established that the possession of the subject property
remained with respondent-spouses despite the execution of the
Deed of Absolute Sale on April 13, 1955. In fact, testimonies during
the trial showed that petitioner and his predecessors never
disturbed the possession of respondent-spouses until the filing of
the ejectment case on April 12, 1992.24
Moreover, the evidence presented by respondent-spouses
indubitably reveals that they signed the contract under threat of

prosecution, with the view to secure the payment of the P3,000.00

defalcated by respondent Felix. Amado Ll. Ayson and Blas F.
Rayos obviously exerted undue influence on Felix taking
advantage of the latters lack of education and understanding of
the legal effects of his signing the deed.
Respondent-spouses have clearly proven that they have already
paid the aforesaid amount. That the obligation was paid in
installments through salary deduction over a period of 10 years
from the signing of the Deed of Absolute Sale is of no moment. It is
safe to assume that this repayment scheme was in the nature of
an easy payment plan based on the respondent-spouses capacity
to pay. Also noteworthy is that the deductions from respondent
Felixs salary amounted to a total of P5,791.69,25 or almost double
the obligation of P3,000.00. Furthermore, it cannot be denied that
petitioner failed to adduce countervailing proof that the payments,
as evidenced by the volume of receipts, were for some other
obligation.1avvphi1
That the realty taxes paid by respondent-spouses was only for
their house can be explained by the fact that, until the filing of the
ejectment case, respondent Maxima was not aware that the land
she co-owned was already partitioned, such that the payments of
real estate taxes in her name were limited to the improvement on
the land.
An equitable mortgage is a voidable contract. As such, it may be
annulled within four (4) years from the time the cause of action
accrues. This case, however, not only involves a contract resulting
from fraud, but covers a transaction ridden with threat, intimidation,
and continuing undue influence which started when petitioners
adoptive father Amado Ll. Ayson and Blas F. Rayos, Felixs
superiors at Dagupan Colleges, practically bullied respondentspouses into signing the Deed of Absolute Sale under threat of
incarceration. Thus, the four-year period should start from the time
the defect in the consent ceases. 26 While at first glance, it would
seem that the defect in the consent of respondent-spouses ceased
either from the payment of the obligation through salary deduction
or from the death of Amado Ll. Ayson and Blas F. Rayos, it is
apparent that such defect of consent never ceased up to the time
of the signing of the Affidavit on April 8, 1992 when Zareno, acting
on behalf of petitioner, caused respondent Felix to be brought to
him, and taking advantage of the latter being unlettered, unduly
influenced Felix into executing the said Affidavit for a fee of
P10,000.00.27 The complaint praying for the nullity of the Deed of
Absolute Sale was filed on October 11, 1993, well within the fouryear prescriptive period.
Regarding the finality of the adjudication of physical possession in
favor of petitioner, it may be reiterated that the right of possession
is a necessary incident of ownership. This adjudication of
ownership of the property to respondent-spouses must include the
delivery of possession to them since petitioner has not shown a
superior right to retain possession of the land independently of his
claim of ownership which is herein rejected. Verily, to grant
execution of the judgment in the ejectment case would work an
injustice on respondent-spouses who had been conclusively
declared the owners and thus, rightful possessors of the disputed
land.28
WHEREFORE, the petition is DENIED and the Decision of the
Court of Appeals in CA-G.R. CV No. 59645 dated May 31, 2000 is
AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 166183

January 20, 2006

SPS. TITO ALVARO and MARIA VALELO, Petitioners,

vs.
SPS. OSMUNDO TERNIDA and JULITA RETURBAN,
COURT OF APPEALS, Respondents.
DECISION

of action.11 Respondents filed a motion for reconsideration

which was however denied.12
On appeal, the Court of Appeals reversed the decision of the
trial court, thus:
WHEREFORE, the appeal is granted and the Decision dated
September 10, 1998 of the trial court is reversed and set aside.
The Deed of Absolute Sale dated May 22, 1990 between
plaintiff-appellant Julita Returban and defendants-appellees
spouses Tito Alvaro and Maria Valelo shall be construed as an
equitable mortgage and the Tax Declaration 2747 issued in the
name of spouses Tito Alvaro and Maria Valelo is annulled.
Consequently, plaintiffs-appellants are entitled to redeem the
property which shall be effected upon payment of their
mortgage debt to defendants-appellees.

YNARES-SANTIAGO, J.:
SO ORDERED.13
Assailed in this petition for review on certiorari under Rule 45
of the Rules of Court are the July 30, 2004 Decision 1 of the
Court of Appeals in CA-G.R. CV No. 61985 and the November
3, 2004 Resolution2 which denied petitioners motion for
reconsideration.
The antecedent facts are as follows:
Respondent-spouses Osmundo Ternida and Julita Returban
are the owners of the contested property, an 8,450 sq. m.
parcel of non-irrigated riceland situated at Barangay Labney,
San Jacinto, Pangasinan.
On May 26, 1986, Julita mortgaged the land to the spouses
Salvador de Vera and Juanita Orinion for P28,000.00. As
testified3 to by Julita, she was made to sign a Deed of Pacto de
Retro Sale4 with Salvador who explained to her that what she
signed was a mortgage document. As worded, the document
provided that Julita has three years from the date of the
execution of the document to repurchase the land.
After a year, Salvador executed a Deed of Transfer of
Mortgage5 in favor of the spouses Jose Calpito and Zoraida
Valelo for a consideration of P32,000.00. Thereafter, Julita
requested from the latter for an additional amount of
P3,000.00, at which point, she was asked6 to sign a Deed of
Sale with Right to Repurchase.7
On May 22, 1990, Julita again asked for an additional amount
of P1,000.00 but she was informed by Jose Calpito that they
have transferred the mortgage to the spouses Tito Alvaro and
Maria Valelo, herein petitioners. Julita thus went to the
petitioners who gave her the additional amount of P1,000.00.
Julita claimed that petitioners asked her to sign a document
that she believed was a mortgage document but later on
turned out to be a Deed of Absolute Sale 8 over the contested
property.
When Julita tried to redeem the property from the petitioners,
the latter refused and claimed that they had purchased the
property and were in fact issued Tax Declaration No. 2747.9
Consequently, on October 1, 1997, respondents filed a
complaint for Annulment of Deed of Sale Documents and Tax
Declaration No. 2747 with the Regional Trial Court of Dagupan
City, docketed as Civil Case No. 97-01876-D.10 After trial on the
merits, the trial court dismissed the complaint for lack of cause

Hence this petition for review on the following grounds:

1. THAT THE HONORABLE COURT OF APPEALS
COMMITTED AN ERROR IN LAW WHEN IT
DECLARED THE TRANSACTION BETWEEN THE
PARTIES AS EQUITABLE MORTGAGE AND NOT AN
ABSOLUTE SALE;
2. THAT THE HONORABLE COURT OF APPEALS
COMMITTED AN ERROR IN LAW WHEN IT
DECLARED
THE
ANNULMENT
OF
TAX
DECLARATION 2747 IN THE NAMES OF THE
PETITIONERS;
3. THAT THE HONORABLE COURT OF APPEALS
COMMITTED AN ERROR IN LAW WHEN IT FAILED
TO APPLY THE JURISPRUDENTIAL RULE LAID
DOWN IN ABILLA VS. GOBONSENG, JR., 374
SCRA 51;
4. THAT THE HONORABLE COURT OF APPEALS
COMMITTED AN ERROR IN LAW WHEN IT FAILED
TO APPLY THE PRINCIPLE OF LACHES AND
ESTOPPEL;
5. THAT THE HONORABLE COURT OF APPEALS
COMMITTED AN ERROR IN LAW WHEN IT FAILED
TO AWARD DAMAGES IN FAVOR OF THE
PETITIONERS.14
Primarily, petitioners contend that the Court of Appeals erred
when it declared the transaction between the parties to be an
equitable mortgage instead of an absolute sale.
The petition lacks merit.
An equitable mortgage is defined as one which although
lacking in some formality, or form or words, or other requisites
demanded by a statute, nevertheless reveals the intention of
the parties to charge real property as security for a debt, and
contains nothing impossible or contrary to law.15 For the
presumption of an equitable mortgage to arise, two requisites
must concur: (1) that the parties entered into a contract
denominated as a sale; and (2) that their intention was to
secure an existing debt by way of a mortgage.16

Consequently, the nonpayment of the debt when due gives the

mortgagee the right to foreclose the mortgage, sell the property
and apply the proceeds of the sale to the satisfaction of the
loan obligation.17
We find no merit in petitioners contention that in the Deed of
Absolute Sale executed between them and Julita, the latter
totally conveyed her ownership over the disputed property. We
have consistently decreed that the nomenclature used by the
contracting parties to describe a contract does not determine
its nature. The decisive factor is the intention of the parties to
the contract as shown by their conduct, words, actions and
deeds prior to, during and after executing the agreement.18
While there is no single conclusive test to determine whether a
deed absolute on its face is really a simple loan
accommodation secured by a mortgage,19 however, the Civil
Code enumerates several instances when a contract is clothed
with the presumption that it is an equitable mortgage, to wit:

Applying the foregoing considerations to the instant case, we

find that the true intention of the parties in the execution of the
Deed of Absolute Sale was never to convey the ownership of
the disputed property but merely to secure the loan obtained
by Julita. As correctly observed by the Court of Appeals:22
The circumstances surrounding the execution and
performance of the terms of the contracts which plaintiffappellant Julita Returban was made to sign involving the
subject property, are inconsistent with the theory that the
property was sold.
When plaintiff-appellant Julita Returban first mortgaged the
land in favor of spouses Salvador de Vera and Juanita Orinion
for the amount of P28,000.00, she was made to sign a Deed of
Pacto de Retro Sale. Salvador de Vera himself was aware that
the subject property was merely mortgaged, not sold, because
he himself subsequently executed a Deed of Transfer
Mortgage in favor of spouses Jose Calpito and Zoraida Valelo
x x x:

Article 1602. The contract shall be presumed to be an

equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee
or otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period
of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of
the purchase price;
(5) When the vendor binds himself to pay the taxes on
the thing sold;
(6) In any other case where it may be fairly
inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt
or the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other
benefit to be received by the vendee as rent or otherwise shall
be considered as interest which shall be subject to the usury
laws. (Emphasis added)
It is an established rule that the presence of even one of the
circumstances set forth in Article 1602 is sufficient to declare a
contract of sale with right to repurchase an equitable
mortgage.20 Thus, under the wise, just and equitable
presumption in Article 1602, a document which appears on its
face to be a sale absolute or with pacto de retro may be
proven by the vendor or vendor-a-retro to be one of a loan with
mortgage. In such case, parol evidence becomes competent
and admissible to prove that the instrument was in truth and in
fact given merely as a security for the payment of a loan. And
upon proof of the truth of such allegations, the court will
enforce the agreement or understanding in consonance with
the true intent of the parties at the time of the execution of the
contract.21

xxxx
When plaintiff-appellant went to spouses Jose Calpito and
Zoraida Valelo to request an additional P3,000.00, she was
made to sign a Deed of Sale with Right to Repurchase in favor
of Jose Calpito and Zoraida Valelo for a purported
consideration of P35,000.00. But it was admitted by defendantappellee Maria Valelo during her direct examination that:
ATTY. DE JESUS:
Q. You said that the amount of P35,000.00 was given to Jose
Calpito and Zoraida Valelo as redemption price of the land
mortgaged by Julita Returban?
A: Yes, sir. (Underlining supplied.)
Actually, plaintiff-appellant Julita Returban was given
P28,000.00 at first and subsequently, she was given the
additional amounts of P3,000.00 by Jose Calpito and Zoraida
Valelo and P1,000.00 by Tito Alvaro and Maria Valelo. The
Supreme Court, in an analogous case, said that:
If the transactions were a true pacto de retro, the purchase
price had been fixed (at P3,600.00) not a centavo more and
respondents giving of additional amounts on (three) different
occasions to be aggregated to the redemption price "was
absolutely inconsistent" with the concept of a "true sale with
pacto de retro."
For her part, Julita testified that during all the times that she
was asked to sign a document evidencing the release of
additional sums of money to her, she always believed, as she
was made to believe, that she was signing a mortgage
document.23
Verily, the conduct of Julita before, during and after the
mortgage of the disputed property negates petitioners
allegation that she intended to sell the land in their favor.
Otherwise, she would have not exerted earnest efforts to
redeem the same.
The conditions which give rise to a presumption of equitable
mortgage, as set out in Article 1602 of the Civil Code, apply

with equal force to a contract purporting to be one of absolute

sale. Moreover, the presence of even one of the circumstances
in Article 1602 is sufficient basis to declare a contract as one of
equitable mortgage. This is in consonance with the rule that
the law favors the least transmission of rights.24
WHEREFORE, the petition is DENIED. The assailed Decision
dated July 30, 2004 of the Court of Appeals in CA-G.R. CV No.
61985 and its November 3, 2004 Resolution, are AFFIRMED.
SO ORDERED.

The Facts
On November 15, 1996, Hamilton Salak rented a car from GAB RentA-Car, a car rental shop owned by petitioner Benjamin Bautista. The
lease was for three (3) consecutive days at a rental fee of P1,000.00
per day.5 However, Salak failed to return the car after three (3) days
prompting petitioner to file a complaint against him for estafa, violation
of Batas Pambansa Blg. 22 and carnapping.6
On February 2, 1997, Salak and his common-law wife, respondent
Shirley G. Unangst, were arrested by officers of the Criminal
Investigation Service Group (CISG) of the Philippine National Police
while riding the rented car along Quezon City. The next day, petitioner
demanded from Salak at the CISG Office the sum of P232,372.00 as
payment for car rental fees, fees incurred in locating the car, attorney's
fees, capital gains tax, transfer tax, and other incidental expenses.7
Salak and respondent expressed willingness to pay but since they
were then short on cash, Salak proposed to sell to petitioner a house
and lot titled in the name of respondent. Petitioner welcomed the
proposal after consulting his wife, Cynthia. Cynthia, on the other hand,
further agreed to pay the mortgage loan of respondent over the subject
property to a certain Jojo Lee in the amount of P295,000.00 as the
property was then set to be publicly auctioned on February 17, 1997.8
To formalize their amicable settlement, Cynthia, Salak and respondent
executed a written agreement.9 They stipulated that respondent would
sell, subject to repurchase, her residential property in favor of Cynthia
for the total amount of P527,372.00 broken down, as follows: (1)
P295,000.00 for the amount paid by Cynthia to Lee to release the
mortgage on the property; and (2) P232,372.00, which is the amount
due to GAB Rent-A-Car. Cynthia also agreed to desist from pursuing
the complaint against Salak and respondent.10
Respondent and petitioner also executed a separate deed of sale with
right to repurchase,11 specifying, among others, that: (1) respondent,
as vendor, shall pay capital gains tax, current real estate taxes and
utility bills pertaining to the property; (2) if respondent fails to
repurchase the property within 30 days from the date of the deed, she
and her assigns shall immediately vacate the premises and deliver its
possession to petitioner without need of a judicial order; and (3)
respondent's refusal to do so will entitle petitioner to take immediate
possession of the property.12

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 173002

July 4, 2008

Respondent failed to repurchase the property within the stipulated

period. As a result, petitioner filed, on June 5, 1998, a complaint for
specific performance or recovery of possession, for sum of money, for
consolidation of ownership and damages against respondent and other
unnamed persons before the RTC of Olongapo City.

DECISION

In his complaint,13 petitioner alleged, among others, that after

respondent failed to repurchase the subject realty, he caused the
registration of the deed of sale with the Register of Deeds and the
transfer of the tax declarations in his name; that respondent failed to
pay the capital gains taxes and update the real estate taxes forcing
him to pay said amounts in the sum of P71,129.05 and P11,993.72,
respectively; and that respondent violated the terms of the deed when
she, as well as the other unnamed persons, refused to vacate the
subject property despite repeated demands.14

THE presumption of equitable mortgage imposes a burden on the

buyer to present clear evidence to rebut it. He must overthrow it, lest it
persist.1 To overturn that prima facie presumption, the buyer needs to
adduce substantial and credible evidence to prove that the contract
was a bona fide deed of sale with right to repurchase.

Petitioner prayed before the RTC that an order be issued in his favor
directing respondents to: (1) surrender the possession of the property;
(2) pay P150,000.00 for the reasonable compensation for its use from
March 7, 1997 to June 7, 1998, plus P10,000.00 per month afterward;
(3) pay the amount advanced by petitioner, to wit: P71,129.05 and
P11,993.72 for the payment of capital gains tax and real estate taxes,
respectively; and P70,000.00 for attorney's fees.15

BENJAMIN BAUTISTA, petitioner,

vs.
SHIRLEY G. UNANGST and OTHER UNKNOWN PERSONS,
respondentS.

REYES, R.T., J.:

This petition for review on certiorari impugns the Decision2 of the Court
of Appeals (CA) in CA-G.R. CV No. 859423 which reversed and set
aside that4 of the Regional Trial Court (RTC) in an action for specific
performance or recovery of possession, for sum of money, for
consolidation of ownerships and damages.

On June 16, 1998, petitioner filed an amended complaint,16 reiterating

his previous allegations but with the added prayer for consolidation of
ownership pursuant to Article 1607 of the Civil Code.17

On the other hand, respondents controverted the allegations in the

complaint and averred in their Answer,18 among others, that plaintiff
had no cause of action inasmuch as respondent Unangst signed the
subject deed of sale under duress and intimidation employed by
petitioner and his cohorts; that, assuming that her consent was freely
given, the contract of sale was simulated and fictitious since the vendor
never received the stipulated consideration; that the sale should be
construed as an equitable mortgage pursuant to Articles 1602 and
1604 of the Civil Code because of its onerous conditions and
shockingly low consideration; that their indebtedness in the form of
arrears in car rentals merely amounts to P90,000.00; and that the
instant action was premature as plaintiff had not yet consolidated
ownership over the property. Defendants counterclaimed for moral
damages in the amount of P500,000.00 and attorney's fees in the
amount of P50,000.00, plus P500.00 per appearance.19

Respondents contended before the CA that the RTC erred in: (1) not
annulling the deed of sale with right to repurchase; (2) declaring that
the deed of sale with right to repurchase is a real contract of sale; (3)
ordering the consolidation of ownership of the subject property in the
name of petitioner.29 They argued that respondent Unangst's consent
to the deed of sale with right to repurchase was procured under duress
and that even assuming that her consent was freely given, the contract
partakes of the nature of an equitable mortgage.30
On the other hand, petitioner insisted, among others, that although the
petition for relief of respondents was filed on time, the proper filing fees
for said petition were paid beyond the 60-day reglementary period. He
posited that jurisdiction is acquired by the court over the action only
upon full payment of prescribed docket fees.31
CA Disposition

On July 29, 2004, after due proceedings, the RTC rendered a decision
in favor of petitioner, disposing as follows:
WHEREFORE, judgment is rendered finding the Deed of
Sale with Right to Repurchase (Exh. "C") as, indeed, a
document of sale executed by the defendant in favor of the
plaintiff covering the parcel of land house (sic) situated at Lot
3-B, Blk. 10, Waterdam Road, Gordon Heights, Olongapo
City, declared under Tax Declaration Nos. 004-7756R and
7757R (Exhs. "I" and "I-1"). The defendant and any person
taking rights from her is (sic) ordered to immediately vacate
from the place and turn over its possession to the plaintiff.
They are likewise directed not to remove any part of the
building on the lot.
The ownership of the said property is properly consolidated
in the name of the plaintiff.
The defendant is further ordered to pay to the plaintiff the
amount of P10,000.00 a month from March 7, 1997 up to the
time possession of the lot and house is restored to the
plaintiff representing the reasonable value for the use of the
property; the amount of P71,129.05 representing the
payment made by the plaintiff on the capital gain taxes and
the further amount of P70,000.00 for attorney's fees and the
costs of suit.
SO ORDERED.20
Respondents failed to interpose a timely appeal. However, on
September 10, 2004, respondent Unangst filed a petition for relief
pursuant to Section 38 of the 1997 Rules on Civil Procedure. She
argued that she learned of the decision of the RTC only on September
6, 2004 when she received a copy of the motion for execution filed by
petitioner.21
Petitioner, on the other hand, moved for the dismissal of respondent's
petition on the ground that the latter paid an insufficient sum of
P200.00 as docket fees.22
It appears that respondent Unangst initially paid P200.00 as docket
fees as this was the amount assessed by the Clerk of Court of the
RTC.23 Said amount was insufficient as the proper filing fees amount to
P1,715.00. Nevertheless, the correct amount was subsequently paid
by said respondent on February 22, 2005.24
In their comment,25 respondents countered that they should not be
faulted for paying deficient docket fees as it was due to an erroneous
assessment of the Clerk of Court.26
The RTC granted the petition for relief. Subsequently, it directed
respondents to file a notice of appeal within twenty-four (24) hours
from receipt of the order.27 Accordingly, on February 23, 2005,
respondents filed their notice of appeal.28

In a Decision32 dated April 7, 2006, the CA reversed and set aside the
RTC judgment.33 The dispositive part of the appellate court's decision
reads, thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is
hereby GRANTED, the challenged Decision dated July 29,
2004 hereby (sic) REVERSED and SET ASIDE, and a new
one entered declaring the Deed of Sale With Right Of
Repurchase dated February 4, 1997 as an equitable
mortgage. No cost.
SO ORDERED.34
The CA declared that the Deed of Sale with Right of Repurchase
executed by the parties was an equitable mortgage. On the procedural
aspect pertaining to the petition for relief filed by respondent Unangst,
the CA ruled that "the trial court, in opting to apply the rules liberally,
cannot be faulted for giving due course to the questioned petition for
relief which enabled appellants to interpose the instant appeal." 35 It
ratiocinated:
Appellee recognizes the timely filing of appellants' petition for
relief to be able to appeal judgment but nonetheless points
out that the proper filing fees were paid beyond the 60-day
reglementary period. Arguing that the court acquires
jurisdiction over the action only upon full payment of the
prescribed docket fees, he submits that the trial court erred
in granting appellants' petition for relief despite the late
payment of the filing fees.
While this Court is fully aware of the mandatory nature of the
requirement of payment of appellate docket fee, the High
Court has recognized that its strict application is qualified by
the following: first, failure to pay those fees within the
reglementary period allows only discretionary, not automatic,
dismissal; second, such power should be used by the court
in conjunction with its exercise of sound discretion in
accordance with the tenets of justice and fair play, as well as
with a great deal of circumspection in consideration of all
attendant
circumstances
(Meatmasters
International
Corporation v. Lelis Integrated Development Corporation,
452 SCRA 626 [2005], citing La Salette College v. Pilotin,
418 SCRA 380 [2003]).
Applied in the instant case, the docket fees were admittedly
paid only on February 22, 2005, or a little less than two (2)
months after the period for filing the petition lapsed. Yet, this
matter was sufficiently explained by appellants. The records
bear out that appellants initially paid P200.00 as docket fees
because this was the amount assessed by the Clerk of Court
of the RTC of Olongapo City (p. 273, Records). As it turned
out, the fees paid was insufficient, the proper filing fees
being P1,715.00, which was eventually paid by appellants on
February 1, 2005 (p. 296, Records). As such, appellants
cannot be faulted for their failure to pay the proper docket
fees for, given the prevailing circumstances, such failure was

clearly not a dilatory tactic nor intended to circumvent the

Rules of Court. On the contrary, appellants demonstrated
their willingness to pay the docket fees when they
subsequently paid on the same day they were assessed the
correct fees (p. 299, Records). Notably, in Yambao v. Court
of Appeals (346 SCRA 141 [2000]), the High Court declared
therein that "the appellate court may extend the time for the
payment of the docket fees if appellants is able to show that
there is a justifiable reason for his failure to pay the correct
amount of docket fees within the prescribed period, like
fraud, accident, mistake, excusable negligence, or a similar
supervening casualty, without fault on the part of appellant."
Verily, the trial court, in opting to apply the rules liberally,
cannot be faulted for giving due course to the questioned
petition for relief which enabled appellants to interpose the
instant appeal.36
On the substantial issues, the CA concluded that "While the records is
bereft of any proof or evidence that appellee employed unlawful or
improper pressure against appellant Unangst to give her consent to the
contract of sale, there is, nevertheless, sufficient basis to hold the
subject contract as one of equitable mortgage."37 It explained:
Jurisprudence has consistently held that the nomenclature
used by the contracting parties to describe a contract does
not determine its nature. The decisive factor in determining
the true nature of the transaction between the parties is the
intent of the parties, as shown not necessarily by the
terminology used in the contract but by all the surrounding
circumstances, such as the relative situations of the parties
at that time; the attitudes, acts, conduct, and declarations of
the parties; the negotiations between them leading to the
deed; and generally, all pertinent facts having a tendency to
fix and determine the real nature of their design and
understanding (Legaspi v. Ong, 459 SCRA 122 [2005]).
It must be stressed, however, that there is no conclusive test
to determine whether a deed absolute on its face is really a
simple loan accommodation secured by a mortgage. In fact,
it is often a question difficult to resolve and is frequently
made to depend on the surrounding circumstances of each
case. When in doubt, courts are generally inclined to
construe a transaction purporting to be a sale as an
equitable mortgage, which involves a lesser transmission of
rights and interests over the property in controversy
(Legaspi, ibid.).
Article 1602 of the Civil Code enumerates the instances
where a contract shall be presumed to be an equitable
mortgage when - (a) the price of a sale with right to
repurchase is unusually inadequate; (b) the vendor remains
in possession as lessee or otherwise; (c) upon or after the
expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period
is executed; (d) the purchaser retains for himself a part of
the purchase price; (e) the vendor binds himself to pay taxes
on the thing sold; and, (f) in any other case where it may be
fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the
performance of any other obligation (Legaspi, supra;
Martinez v. Court of Appeals, 358 SCRA 38 [2001]).
For the presumption of an equitable mortgage to arise under
Article 1602, two (2) requisites must concur: (a) that the
parties entered into a contract denominated as a contract of
sale; and, (b) that their intention was to secure an existing
debt by way of a mortgage. Any of the circumstance laid out
in Article 1602, not the concurrence nor an overwhelming
number of the circumstances therein enumerated, suffices to
construe a contract of sale to be one of equitable mortgage
(Lorbes v. Court of Appeals, 351 SCRA 716 [2001]).
Applying the foregoing considerations in the instant case,
there is hardly any doubt that the true intention of the parties
is that the transaction shall secure the payment of a debt. It

is not contested that before executing the subject deed,

Unangst and Salak were under police custody and were
sorely pressed for money. Such urgent prospect of
prolonged detention helps explain why appellants would
subscribe to an agreement like the deed in the instant case.
This might very well explain appellants' insistence that
Unangst was not truly free when she signed the questioned
deed. Besides, there is no gainsaying that when appellee
allowed appellants to retain possession of the realty sold for
30 days, as part of the agreement, that period of time surely
signaled a time allotted to Salak and Unangst, as debtors,
within which to pay their mortgage indebtedness.
The High Court, in several cases involving similar situations,
has declared that "while it was true that plaintiffs were aware
of the contents of the contracts, the preponderance of the
evidence showed, however, that they signed knowing that
said contracts did not express their real intention, and if they
did so notwithstanding this, it was due to the urgent
necessity of obtaining funds. Necessitous men are not, truly
speaking, free men; but to answer a present emergency, will
submit to any terms that the crafty may impose upon them"
(Lorbes, ibid.; Reyes v. Court of Appeals, 339 SCRA 97
[2000]; Lao v. Court of Appeals, 275 SCRA 237 [1997];
Zamora v. Court of Appeals, 260 SCRA 10 [1996]; Labasan
v. Lacuesta, 86 SCRA 16 [1978]).
After all, Article 1602(6) provides that a contract of sale with
right to repurchase is presumed to be an equitable mortgage
in any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any obligation. In
fine, a careful review of the records convincingly shows that
the obtaining facts in this case qualify the controversial
agreement between the parties as an equitable mortgage
under Article 1602 of the New Civil Code.38
Issues
Petitioner has resorted to the present recourse under Rule 45,
assigning to the CA the following errors:
(a) The Honorable Court of Appeals committed grave error in
finding that the respondent perfected an appeal via Petition
for Relief To Be Able To Appeal Judgment even when the
proper docket fees were paid beyond the period prescribed
to bring such action under Section 3 of Rule 38 of the 1997
Rules of Civil Procedure in relation to the pronouncements
by the Honorable Court in the cases of Philippine Rabbit Bus
Lines, Inc. v. Arciaga [148 SCRA 433], Philippine Pryce
Assurance Corp. v. Court of Appeals [148 SCRA 433] and
Sun Insurance Office, Ltd. v. Asuncion [170 SCRA 274].
(b) The Honorable Court of Appeals erred on a question of
law in reversing the Decision of the Court a quo finding the
Deed of Sale with Right to Repurchase a document of sale
executed by the respondent in favor of the petitioner and in
further holding such contract as one of equitable mortgage.39
Our Ruling
On the first issue, petitioner contends that respondents' "Petition for
Relief to Be Able to Appeal Judgment," which paved the way for the
allowance of respondents' appeal of the RTC decision, was filed within
the prescriptive period but the proper docket fees for it were belatedly
paid.40 He thus posits that the RTC did not acquire jurisdiction over
said petition. Having no jurisdiction, the RTC could not have allowed
respondents to appeal.
On this issue, respondent counters that the belated payment of proper
docket fees was not due to their fault but to the improper assessment
by the Clerk of Court. Respondent asserts the ruling of the CA that the
court may extend the time for the payment of the docket fees if there is

a justifiable reason for the failure to pay the correct amount. Moreover,
respondent argues that petitioner failed to contest the RTC Order
dated February 21, 2004 that allowed the payment of supplementary
docket fees. Petitioner failed to file a motion for reconsideration or a
petition for certiorari to the higher court to question said order.
We agree with respondents. Their failure to pay the correct amount of
docket fees was due to a justifiable reason.
The right to appeal is a purely statutory right. Not being a natural right
or a part of due process, the right to appeal may be exercised only in
the manner and in accordance with the rules provided therefor.41 For
this reason, payment of the full amount of the appellate court docket
and other lawful fees within the reglementary period is mandatory and
jurisdictional.42 Nevertheless, as this Court ruled in Aranas v. Endona,43
the strict application of the jurisdictional nature of the above rule on
payment of appellate docket fees may be mitigated under exceptional
circumstances to better serve the interest of justice. It is always within
the power of this Court to suspend its own rules, or to except a
particular case from their operation, whenever the purposes of justice
require it.44
In not a few instances, the Court relaxed the rigid application of the
rules of procedure to afford the parties the opportunity to fully ventilate
their cases on the merits. This is in line with the time-honored principle
that cases should be decided only after giving all parties the chance to
argue their causes and defenses.45 For, it is far better to dispose of a
case on the merit which is a primordial end, rather than on a
technicality, if it be the case, that may result in injustice. 46 The
emerging trend in the rulings of this Court is to afford every partylitigant the amplest opportunity for the proper and just determination of
his cause, free from the constraints of technicalities.47
48

As early as 1946, in Segovia v. Barrios, the Court ruled that where an

appellant in good faith paid less than the correct amount for the docket
fee because that was the amount he was required to pay by the clerk
of court, and he promptly paid the balance, it is error to dismiss his
appeal because "(e)very citizen has the right to assume and trust that
a public officer charged by law with certain duties knows his duties and
performs them in accordance with law. To penalize such citizen for
relying upon said officer in all good faith is repugnant to justice." 49
Technicality and procedural imperfections should thus not serve as
bases of decisions.50 In that way, the ends of justice would be better
served. For, indeed, the general objective of procedure is to facilitate
the application of justice to the rival claims of contending parties,
bearing always in mind that procedure is not to hinder but to promote
the administration of justice.51
We go now to the crux of the petition. Should the deed of sale with
right to repurchase executed by the parties be construed as an
equitable mortgage? This is the pivotal question here.
According to petitioner, the deed should not be construed as an
equitable mortgage as it does not fall under any of the instances
mentioned in Article 1602 of the Civil Code where the agreement can
be construed as an equitable mortgage. He added that the "language
and terms of the Deed of Sale with Right to Repurchase executed by
respondent in favor of the petition are clear and unequivocal. Said
contract must be construed with its literal sense."52
We cannot agree.
Respondent is correct in alleging that the deed of sale with right to
repurchase qualifies as an equitable mortgage under Article 1602. She
merely secured the payment of the unpaid car rentals and the amount
advanced by petitioner to Jojo Lee.
The transaction between the parties is one of equitable mortgage and
not a sale with right to purchase as maintained by petitioners. Article
1602 of the New Civil Code provides that the contract is presumed to
be an equitable mortgage in any of the following cases:

(1) When the price of a sale with right to repurchase is

unusually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the
thing sold;
(6) In any other case where it may be fairly inferred that
the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance
of any other obligation.
In any of the foregoing cases, any money, fruits, or other
benefit to be received by the vendee as rent or otherwise
shall be considered as interest which shall be subject to the
usury laws.53 (Emphasis ours)
The conclusion that the deed of sale with right to repurchase is an
equitable mortgage is buttressed by the following:
First, before executing the deed, respondent and Salak were under
police custody due to the complaint lodged against them by petitioner.
They were sorely pressed for money, as they would not be released
from custody unless they paid petitioner. It was at this point that
respondent was constrained to execute a deed of sale with right to
repurchase. Respondent was in no position whatsoever to bargain with
their creditor, petitioner. Nel consensui tam contrarium est quam vis
atqui metus. There can be no consent when under force or duress.
Bale wala ang pagsang-ayon kung ito'y nakuha sa pamimilit o
paraang di malaya.
It is established that respondent signed the deed only because of the
urgent necessity of obtaining funds.1avvphi1 When the vendor is in
urgent need of money when he executes the sale, the alleged sale with
pacto de retro will be construed as an equitable mortgage. 54
"Necessitous men are not, truly speaking, free men; but to answer a
present emergency will submit to any terms that the crafty may impose
upon them."55
Second, petitioner allowed respondent and Salak to retain the
possession of the property despite the execution of the deed. In fact,
respondent and Salak were not bound to deliver the possession of the
property to petitioner if they would pay him the amount he demanded.56
Where in a contract of sale with pacto de retro, the vendor remains in
possession, as a lessee or otherwise, the contract shall be presumed
to be an equitable mortgage.57 The reason for the presumption lies in
the fact that in a contract of sale with pacto de retro, the legal title to
the property is immediately transferred to the vendee, subject to the
vendor's right to redeem. Retention, therefore, by the vendor of the
possession of the property is inconsistent with the vendee's acquisition
of the right of ownership under a true sale. 58 It discloses, in the alleged
vendee, a lack of interest in the property that belies the truthfulness of
the sale a retro.59
Third, it is likewise undisputed that the deed was executed by reason
of: (1) the alleged indebtedness of Salak to petitioner, that is, car rental
payments; and (2) respondent's own obligation to petitioner, that is,
reimbursement of what petitioner paid to the mortgagee, Jojo Lee. Fact
is, the purchase price stated in the deed was the amount of the
indebtedness of both respondent and Salak to petitioner.60

Apparently, the deed purports to be a sale with right to purchase.

However, since it was executed in consideration of the aforesaid loans
and/or indebtedness, said contract is indubitably an equitable
mortgage. The rule is firmly settled that whenever it is clearly shown
that a deed of sale with pacto de retro, regular on its face, is given as
security for a loan, it must be regarded as an equitable mortgage.61
The above-mentioned circumstances preclude the Court from
declaring that the parties intended the transfer of the property from one
to the other by way of sale. They are more than sufficient to show that
the true intention of the parties is to secure the payment of said debts.
Verily, an equitable mortgage under paragraphs 2 and 6 of Article 1602
exists here. Settled is the rule that to create the presumption
enunciated by Article 1602, the existence of one circumstance is
enough.62
Moreover, under Article 1603 of the Civil Code it is provided that: "(i)n
case of doubt, a contract purporting to be a sale with right to
repurchase shall be construed as an equitable mortgage." In this case,
We have no doubt that the transaction between the parties is that of a
loan secured by said property by way of mortgage.
In Lorbes v. Court of Appeals,63 the Court held that:
The decisive factor in evaluating such agreement is the
intention of the parties, as shown not necessarily by the
terminology used in the contract but by all the surrounding
circumstances, such as the relative situation of the parties at
that time, the attitude, acts, conduct, declarations of the
parties, the negotiations between them leading to the deed,
and generally, all pertinent facts having a tendency to fix and
determine the real nature of their design and understanding.
As such, documentary and parol evidence may be submitted
and admitted to prove the intention of the parties.
Sales with rights to repurchase, as defined by the Civil Code, are not
favored. We will not construe instruments to be sales with a right to
repurchase, with the stringent and onerous effects which follow, unless
the terms of the document and the surrounding circumstances require
it. Whenever, under the terms of the writing, any other construction can
fairly and reasonably be made, such construction will be adopted and
the contract will be construed as a mere loan unless the court can see
that, if enforced according to its terms, it is not an unconscionable
one.64

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 139884

Article 1602 of the Civil Code is designed primarily to curtail the evils
brought about by contracts of sale with right of repurchase, such as the
circumvention of the laws against usury and pactum commissorium.65
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.

February 15, 2001

SPOUSES OCTAVIO and EPIFANIA LORBES, petitioners,

vs.
COURT OF APPEALS, RICARDO DELOS REYES and
JOSEFINA CRUZ, respondents.
GONZAGA-REYES, J.:
This petition for review on certiorari arose from an action for
reformation of instrument and damages originally filed with the
Regional Trial Court of Antipolo, Rizal, Branch 74, the decision on
which was reviewed and reversed by the Third Division of the
Court of Appeals.
Petitioners were the registered owners of a 225-square meter
parcel of land located in Antipolo, Rizal covered by Transfer
Certificate of Title No. 165009. Sometime in August 1991,
petitioners mortgaged this property to Florencio and Nestor Carlos
in the amount of P150,000.00.
About a year later, the mortgage obligation had increased to
P500,000.00 and fearing foreclosure of the property, petitioners
asked their son-in-law, herein private respondent Ricardo delos
Reyes, for help in redeeming their property. Private respondent
delos Reyes agreed to redeem the property but because he
allegedly had no money then for the purpose he solicited the
assistance of private respondent Josefina Cruz, a family friend of
the delos Reyeses and an employee of the Land Bank of the
Philippines.1wphi1.nt

It was agreed that petitioners will sign a deed of sale conveying the
mortgaged property in favor of private respondent Cruz and
thereafter, Cruz will apply for a housing loan with Land Bank, using
the subject property as collateral. It was further agreed that out of
the proceeds of the loan, P500,000.00 will be paid to the Carloses
as mortgagees, and an such balance will be applied by petitioners
for capital gains tax, expenses for the cancellation of the mortgage
to the Carloses, transfer of title to Josefina Cruz, and registration
of a mortgage in favor of Land Bank. 1 Moreover, the monthly
amortization on the housing loan which was supposed to be
deducted from the salary of private respondent Cruz will be
reimbursed by private respondent delos Reyes.
On September 29, 1992, the Land Bank issued a letter of
guarantee in favor of the Carloses, informing them that Cruzs loan
had been approved. On October 22, 1992, Transfer Certificate of
Title No. 165009 was cancelled and Transfer Certificate of Title No.
229891 in the name of Josefina Cruz was issued in lieu thereof. 2
On November 25, 1992, the mortgage was discharged.
Sometime in 1993, petitioners notified private respondent delos
Reyes that they were ready to redeem the property but the offer
was refused. Aggrieved, petitioners filed on July 22, 1994 a
complaint for reformation of instrument and damages with the RTC
of Antipolo, Rizal, docketed as Civil Case No. 94-3296.
In the complaint, petitioners claimed that the deed was merely a
formality to meet the requirements of the bank for the housing
loan, and that the real intention of the parties in securing the loan
was to apply the proceeds thereof for the payment of the mortgage
obligation.3 They alleged that the deed of sale did not reflect the
true intention of the parties, and that the transaction was not an
absolute sale but an equitable mortgage, considering that the price
of the sale was inadequate considering the market value of the
subject property and because they continued paying the real
estate taxes thereto even after the execution of the said deed of
sale. Petitioners averred that they did not see any reason why
private respondents would retract from their original agreement
other than that they (petitioners) and the members of their family
resigned en masse from the Mahal Namin Organization, of which
private respondent delos Reyes was the president and chairman of
the board of directors, and private respondent Cruz was the
treasurer. In the same complaint, they demanded moral damages,
exemplary damages, and attorneys fees.
On July 29, 1996, the trial court issued a temporary restraining
order enjoining private respondents from ejecting petitioners from
the premises of the disputed property; this was soon replaced by a
writ of preliminary injunction.
Summons and a copy of the complaint were served upon private
respondents on August 1, 1994. Private respondents filed their
answer beyond the reglamentary period, or only on September 1,
1994. Thus, on September 5, 1994, petitioners filed a motion to
declare private respondents in default, which the trial court granted
in an order dated September 16, 1994. On September 30 of the
same year, petitioners presented their evidence ex parte before
the trial court. The principal witness presented was petitioner
Octavio Lorbes, whose testimony was corroborated by his son,
Atty. Salvador Lorbes.
On October 12, 1994, private respondents filed a motion to lift
order of default and to strike out evidence presented ex parte,
which the court denied in an order dated October 26, 1994.
On June 20, 1995, the trial court rendered judgment in favor of
petitioners, upon finding that: (1) the Deed of Absolute Sale dated
October 21, 1992 did not reflect the true intention of the parties,
and (2) the transaction entered into between petitioners and Cruz
was not an absolute sale but an equitable mortgage, considering
that the price stated in the Deed of Absolute Sale was insufficient
compared to the value of the property, petitioners are still in
possession of the property, and petitioners had continued to pay
the real estate taxes thereon after the execution of the said deed
of sale. As explained by the trial court in its decision:

The foregoing uncontroverted facts clearly show that the

transaction entered into between the plaintiffs and the
defendants is not an absolute sale but merely an
equitable mortgage as the sale was executed in order to
secure a loan from a certain bank to save the property
from the danger of foreclosure and to use it as collateral
thereof for bank loan purposes and that the same does
not reflect the real intention of the parties in executing the
said Deed of Sale. The court notes that at the time the
transaction and the Deed of Absolute Sale was executed
by the plaintiffs sometime in 1992, the prevailing market
value of the lot alone was P400,000.00 per square meter
such that the lot alone consisting of 255 square meters,
excluding the house and improvements thereon would
already cost more than a million pesos already hence,
the consideration of P600,000.00 in the said Deed of
Sale is considerably insufficient compared to the value of
the property. Further, the plaintiffs are still in possession
of the subject property and had been paying the realty
taxes thereon even after the execution of the sale and
the transfer of the title from the plaintiffs to defendant
Josephine Cruz which clearly evinces the true badge of
the transaction which occurred between the plaintiffs and
defendants as that of an equitable mortgage and not an
absolute sale and that the plaintiffs were only compelled
to enter into the said transaction of sale with the
defendants as the former were in extreme need of money
in order to redeem their only conjugal property and to
save it from being foreclosed for non-payment of the
mortgage obligation and that it was never the intention of
the plaintiffs to sell the property to the defendants, as it
was their agreement that plaintiffs can redeem the
property or any member of the family thereof, when they
become financially stable.4
The dispositive portion of the trial courts decision thus provides:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered in favor of the plaintiffs and against the
defendants, ordering the latter jointly and severally, as
follows:
1. To reconvey the subject property to the
plaintiffs upon payment of the price stipulated in
the contract of sale;
2. To pay plaintiffs the sum of P50,000.00 as
moral damages;
3. To pay plaintiffs the sum of P50,000.00 as
and by way of attorneys fees plus P1,000.00
per court appearance;
4. To pay the costs of suit.
SO ORDERED.5
The Court of Appeals reversed the above decision, finding that
private respondents were denied due process by the refusal of the
trial court to lift the order of default against them, and that the
transaction between petitioners and Cruz was one of absolute
sale, not of equitable mortgage. It also held the RTC decision to be
constitutionally infirm for its failure to clearly and distinctly state the
facts and the law on which it is based.
The Court of Appeals held that the reformation of the Deeds of
Absolute Sale in the instant case is improper because there is no
showing that such instrument failed to express the true intention of
the parties by reason of mistake, fraud, inequitable conduct, or
accident in the execution thereof.6 To the Court of Appeals, the
transaction was unmistakably a contract of sale, as evidenced by
the numerous supporting documents thereto, such as the Contract
to Sell dated June 1992, Affidavit of Waiver/Assignment dated
August 14, 1992, Receipt of Partial Advance Payment dated
September 9, 1992, and Transfer Certificate of Title No. 229891
issued in the name of private respondent Cruz. Going over the
indicators giving rise to a presumption of equitable mortgage cited

in the decision of the RTC, the Court of Appeals held: (1)

inadequacy of price is material only in a sale with right to
repurchase, which is not the case with herein petitioners and Cruz;
moreover, the estimate of the market value of the property came
only from the bare testimony of petitioner Octavio Lorbes, (2)
petitioners remaining in possession of the property resulted only
from their refusal to vacate the same despite the lawful demands
of private respondent Cruz, and (3) there was no documentary
evidence that petitioners continued paying the taxes on the
disputed property after the execution of the Deed of Absolute Sale.
In its decision, the Court of Appeals also pointed out that under the
usual arrangement of pacto de retro the vendor of the property is a
debtor of the vendee, and the property is used as security for his
obligation. In the instant case, the mortgage creditors (the
Carloses) are third persons to the Deed of Absolute Sale.
This petition raises three issues before the Court: (1) whether
respondent court erred in ruling that the Deed of Absolute Sale
dated October 21, 1992 was an equitable mortgage, (2) whether
respondent court erred in ruling that by declaring private
respondents in default they were denied due process of law, and
(3) whether respondent court erred in ruling that the trial courts
decision violates the constitutional requirement that it should
clearly and distinctly state the facts and the law on which it is
based.7
We shall first deal with the second and third issues, these being
preliminary matters.
Well-settled is the rule that courts should be liberal in setting aside
orders of default for judgments of default are frowned upon, unless
in cases where it clearly appears that the reopening of the case is
intended for delay.8 The issuance of orders of default should be the
exception rather than the rule, to be allowed only in clear cases of
obstinate refusal by the defendant to comply with the orders of the
trial court.9
Under the factual milieu of this case, the RTC was indeed remiss
in denying private respondents motion to lift the order of default
and to strike out the evidence presented by petitioners ex parte,
especially considering that an answer was filed, though out of time.
We thus sustain the holding of the Court of Appeals that the default
order of the RTC was immoderate and in violation of private
respondents due process rights. However, we do not think that the
violation was of a degree as to justify a remand of the proceedings
to the trial court, first, because such relief was not prayed for by
private respondents, and second, because the affirmative
defenses and evidence that private respondents would have
presented before the RTC were capably ventilated before
respondent court, and were taken into account by the latter in
reviewing the correctness of the evaluation of petitioners evidence
by the RTC and ultimately, in reversing the decision of the RTC.
This is evident from the discussions in the decision of the Court of
Appeals, which cited with approval a number of private
respondents arguments and evidence, including the documents
annexed to their opposition to the issuance of a writ of preliminary
injunction filed with the RTC.10 To emphasize, the reversal of
respondent court was not simply on due process grounds but on
the merits, going into the issue of whether the transaction was one
of equitable mortgage or of sale, and so we find that we can
properly take cognizance of the substantive issue in this case,
while of course bearing in mind the inordinate manner by which the
RTC issued its default order.
As regards the third issue, we reverse for being unfounded the
holding of the Court of Appeals since the RTC decision, some
parts of which we even reproduced in our earlier discussions,
clearly complied with the constitutional requirement to state clearly
and distinctly the facts and the law on which it was based.
Thus, the one issue essential to the resolution of this case is the
nature of the transaction between petitioners and private
respondent Cruz concerning the subject parcel of land. Did the
parties intend for the contested Deed of Absolute Sale to be a

bona fide and absolute conveyance of the property, or merely an

equitable mortgage?
On the outset, it must be emphasized that there is no conclusive
test to determine whether a deed absolute on its face is really a
simple loan accommodation secured by a mortgage. 11 "The
decisive factor in evaluating such agreement is the intention of the
parties, as shown not necessarily by the terminology used in the
contract but by all the surrounding circumstances, such as the
relative situation of the parties at that time, the attitude, acts,
conduct, declarations of the parties, the negotiations between
them leading to the deed, and generally, all pertinent facts having
a tendency to fix and determine the real nature of their design and
understanding. As such, documentary and parol evidence may be
submitted and admitted to prove the intention of the parties."12
The conditions which give way to a presumption of equitable
mortgage, as set out in Article 1602 of the Civil Code, apply with
equal force to a contract purporting to be one of absolute sale. 13
Moreover, the presence of even one of the circumstances laid out
in Article 1602, and not a concurrence of the circumstances therein
enumerated, suffices to construe a contract of sale to be one of
equitable mortgage.14 This is simply in consonance with the rule
that the law favors the least transmission of property rights. 15
Thus, under Article 1602 of the Civil Code, a contract shall be
presumed to be an equitable mortgage when --- (a) the price of a
sale with right to repurchase is unusually inadequate; (b) the
vendor remains in possession as lessee or otherwise; (c) upon or
after the expiration of the right of repurchase another instrument
extending the period of redemption or granting a new period is
executed; (d) the purchaser retains for himself a part of the
purchase price; (e) the vendor binds himself to pay the taxes on
the thing sold; and, (f) in any other case where it may be fairly
inferred that the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance of any other
obligation.
Applying the foregoing considerations to the instant case, the
Court finds that the true intention between the parties for executing
the Deed of Absolute Sale was not to convey ownership of the
property in question but merely to secure the housing loan of Cruz,
in which petitioners had a direct interest since the proceeds thereof
were to be immediately applied to their outstanding mortgage
obligation to the Carloses.
It is not disputed that before the execution of the Deed of Absolute
Sale petitioners mortgage obligation to the Carloses as nearing
maturity and they were in dire need of money to meet the same.
Hence, they asked for the help of their son-in-law delos Reyes who
in turn requested Cruz to take out a housing loan with Land Bank.
Since collateral is a standard requirement of banks in giving out
loans, it was made to appear that the subject property was sold to
Cruz so she can declare the same as collateral for the housing
loan. This was simply in line with the basic requirement in our laws
that the mortgagor be the absolute owner of the property sought to
be mortgaged.16 Consistent with their agreement, as soon as the
housing loan was approved, the full amount of the proceeds were
immediately turned over to petitioners, who promptly paid
P500,000.00 therefrom to the Carloses in full satisfaction of their
mortgage obligation. The balance was spent by petitioners in
transferring title to the property to Cruz and registering the new
mortgage with Land Bank.
Understandably, the Deed of Absolute Sale and its supporting
documents do not reflect the true arrangement between the parties
as to how the loan proceeds are to be actually applied because it
was not the intention of the parties for these documents to do so.
The sole purpose for preparing these documents was to satisfy
Land Bank that the requirement of collateral relative to Cruzs
application for a housing loan was met.
Were we to accept, as respondent court had, that the loan that
Cruz took out with Land Bank was indeed a housing loan, then it is
rather curious that Cruz kept none of the loan proceeds but
allowed for the bulk thereof to be immediately applied to the

payment of petitioners outstanding mortgage obligation. It also

strains credulity that petitioners, who were exhausting all means to
save their sole conjugal real property from being foreclosed by the
Carloses, would concurrently part with the same in favor of Cruz.
Such urgent prospect of foreclosure helps to explain why
petitioners would subscribe to an agreement like the Deed of
Absolute Sale in the herein case, which on its face represents their
unconditional relinquishment of ownership over their property.
Passing upon previous similar situations the Court has declared
that "while it was true that plaintiffs were aware of the contents of
the contracts, the preponderance of the evidence showed however
that they signed knowing that said contracts did not express their
real intention, and if they did so notwithstanding this, it was due to
the urgent necessity of obtaining funds. "Necessitous men are not,
truly speaking, free men; but to answer a present emergency, will
submit to any terms that the crafty may impose upon them." 17
The facts further bear out that petitioners remained in possession
of the disputed property after the execution of the Deed of
Absolute Sale and the transfer of registered title to Cruz in October
1992. Cruz made no demand on petitioners to vacate the subject
premises until March 19, 1994; 18 interestingly, this was two days
after petitioners signified their intention to redeem the property by
paying the full amount of P600,000.00. 19 On this basis, the finding
of respondent court that petitioners remained in possession of the
property only because they refused to vacate on Cruzs demand is
not accurate because the records reflect that no such demand was
made until more than a year since the purported sale of the
property.
Copies of realty tax receipts attached to the record also show that
petitioners continued paying for the taxes on the property for the
period 1992 to 1994,20 or after the property was supposed to have
been sold to Cruz.
From the above, the Court is satisfied that enough of the
circumstances set out in Article 1602 of the Civil Code are
attendant in the instant case, as to show that the true arrangement
between petitioners and private respondent Cruz was an equitable
mortgage.
That a transfer certificate of title was issued in favor of private
respondent Cruz also does not import conclusive evidence of
ownership or that the agreement between the parties was one of
sale. As was stated in Oronce vs. Court of Appeals,21 citing
Macapinlac vs. Gutierrez Repide22:
xxx it must be borne in mind that the equitable doctrine
xxx to the effect that any conveyance intended as
security for a debt will be held in effect to be a mortgage,
whether so actually expressed in the instrument or not,
operates regardless of the form of the agreement chosen
by the contracting parties as the repository of their will.

Equity looks through the form and considers the

substance; and no kind of engagement can be adopted
which will enable the parties to escape from the equitable
doctrine to which reference is made. In other words, a
conveyance of land, accompanied by registration in the
name of the transferee and the issuance of a new
certificate, is no more secured from the operation of the
equitable doctrine than the most informal conveyance
that could be devised.
Before we fully set aside this issue, it will be recalled that the
instant petition originated as a complaint for reformation filed
before the RTC of Antipolo, Rizal. The Court of Appeals found
petitioners action for reformation unmeritorious because there was
no showing that the failure of the deed of sale to express the
parties true intention was because of mistake, fraud, inequitable
conduct, or accident.23 Indeed, under the facts of the present case,
reformation may not be proper for failure to fully meet the
requisites in Article 1359 of the Civil Code, and because as the
evidence eventually bore out the contested Deed of Absolute Sale
was not intended to reflect the true agreement between the parties
but was merely to comply with the collateral requirements of Land
Bank. However, the fact that the complaint filed by petitioners
before the trial court was categorized to be one for reformation of
instrument should not preclude the Court from passing upon the
issue of whether the transaction was in fact an equitable mortgage
as the same has been squarely raised in the complaint and had
been the subject of arguments and evidence of the parties. Thus
we have held that it is not the caption of the pleading but the
allegations therein that determine the nature of the action, and the
Court shall grant relief warranted by the allegations and the proof
even if no such relief is prayed for.24
Finally, on the award of damages. Considering the due process
flaws that attended the default judgment of the RTC, and applying
the rule adopted by this Court that in instances where no actual
damages are adjudicated the awards for moral and exemplary
damages may be reduced,25 we reduce the award for moral
damages in the instant case from P50,000.00 to P30,000.00. At
the same time, we sustain the award of attorneys fees in the
amount of P50,000.00, it being clear that petitioners were
compelled to incur expenses and undergo the rigors of litigation to
recover their property.1wphi1.nt
WHEREFORE, the decision of the Court of Appeals is REVERSED
and SET ASIDE. The decision of the Regional Trial Court of
Antipolo, Rizal is REINSTATED, with the MODIFICATION that the
award of moral damages is reduced to P30,000.00, and in all other
respects AFFIRMED. Costs against private respondents.
SO ORDERED.