Republic of the Philippines

SUPREME COURT

Thereafter, the corporation was reorganized, following

which the spouses Cheng Yong and Lilia Gaw were
elected as its president and treasurer, respectively. The
spouses Cheng also hold similar positions in another
company, the Glee Chemicals Phils., Inc. (GCPI), which,
incidentally, also had a credit line with Allied Bank.

THIRD DIVISION
G.R. No. 151040 October 6, 2005

Meanwhile, on 27 July 1981, the parties in SEC Case No.

2042 agreed to create and constitute a management
committee, instead of placing Philippine Pacific under
receivership. Hence, in an order dated 14 August 1981,
the SEC formally created a management committee
whose functions, include, among others, the following:

ALLIED BANKING CORPORATION, Petitioner,

vs.
CHENG YONG and LILIA GAW, Respondents.
x--------------------------------------------x
G.R. No. 154109

1. To take custody and possession of all assets, funds,

properties and records of the corporation and to prepare
an inventory thereof;

CHENG YONG and LILIA GAW, Petitioners,

vs.
ALLIED BANKING CORPORATION and EX-OFFICIO
SHERIFF OF MALABON, METRO MANILA,
Respondents.

2. To administer, manage and preserve such assets,

funds and records;
xxx xxx xxx

DECISION

7. To acquire, lease, sell, mortgage or otherwise

encumber such assets with the prior approval of the
Commission.4

GARCIA, J.:
Before us are these two (2) petitions for review on
certiorari under Rule 45 of the Rules of Court to nullify
and set aside the following issuances of the Court of
Appeals (CA) in CA-G.R. CV 41280, to wit:
1. Decision dated 11 December 2001, 1 partially
reversing and setting aside an earlier decision of the
Regional Trial Court at Makati, Branch 145, in its Civil
Case No. 10947; and
2. Resolution dated 01 July 2002, 2 denying Cheng
Yong and Lilia Gaws motion for reconsideration.
The material facts:
Sometime before 1981, Philippine Pacific Fishing
Company, Inc. (Philippine Pacific), through its then ViceChairman of the Board and concurrent President Marilyn
Javier, obtained from Allied Banking Corporation (Allied
Bank), a packing credit accommodation amounting to
One Million Seven Hundred Fifty Two Thousand Pesos
(P1,752,000.00).
To secure the obligation, Marilyn Javier and the spouses
Cheng Yong and Lilia Gaw (spouses Cheng, for short),
executed a Continuing Guaranty/Comprehensive Surety
bearing date 27 March 1981.3
Later, Philippine Pacific, due to business reverses and
alleged misuse of corporate funds by its operating
officers, defaulted in the payment of said obligation.
An intra-corporate dispute among its stockholders
followed, prompting the filing against Philippine Pacific of
a petition for receivership before the Securities and
Exchange Commission (SEC), which petition was
docketed as SEC Case No. 2042. Likewise, a criminal
case for Estafa was filed against Marilyn Javier.

It appears, however, that two (2) days prior to the

constitution of the management committee, Allied Bank
and Philippine Pacific agreed to restructure and convert
the packing credit accommodation into a simple loan.
Accordingly, Philippine Pacific executed in favor of Allied
Bank a promissory note dated 12 August 1981 5 in the
same amount as the packing credit accommodation.
Aside from affixing their signatures on the same
promissory note in their capacity as officers of Philippine
Pacific, the spouses Cheng also signed the note in their
personal capacities and as co-makers thereof.
As it turned out, Philippine Pacific failed to pay according
to the schedule of payments set out in the promissory
note of 12 August 1981, prompting the spouses Cheng
to secure the note with substantial collateral by
executing a deed of chattel mortgage in favor of Allied
Bank over a fishing vessel, "Jean III", a Japanesemanufactured vessel with refrigerated hatches and glass
freezers, owned by the spouses and registered in their
names.
Philippine Pacific again defaulted payment. Hence, on 18
September 1984, Allied Bank filed with the sheriff of
Navotas an application for extra-judicial foreclosure of
the chattel mortgage constituted on "Jean III".
Pursuant thereto, notices of extra-judicial sale dated 21
September 1981 were served on the concerned parties
by the Ex-Officio sheriff of Malabon while the vessel was
moored at the Navotas Fishing Port Complex and under a
charter contract with Lig Marine Products, Inc.
On 27 September 1984, the spouses Cheng, to prevent
the auction sale of the vessel, filed with the Regional
Trial Court at Quezon City an action for declaratory relief
with prayer for injunctive remedies. Initially, that court
issued a writ of preliminary injunction restraining the
sale but later lifted it upon dismissal of the main case for
declaratory relief on 29 March 1985.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

In the meantime, the vessel sank at the port of Navotas

on 22 June 1985, resulting to its total loss. As per
certification of the Harbor Master of the Philippine
Fisheries Development Authority, the vessel sank due to
unnoticed defects caused by its prolonged stay in the
fish port and the abandonment thereof. Shortly before
the loss, charterer Lig Marine Products, Inc. offered to
purchase
the
vessel
for
Four
Million
Pesos
(P4,000,000.00).
On 26 June 1985, the spouses Cheng filed with the
Regional Trial Court at Makati a complaint for Injunction,
Annulment of Contracts and Damages with the
provisional remedy of Preliminary Injunction, against
Allied Bank and the Ex-Officio Sheriff of Malabon, therein
praying, inter alia, that the promissory note dated 12
August 1981 be declared void and unenforceable
because it was executed without the prior approval or
ratification of the SEC-created management committee
in SEC Case No. 2042, and to declare invalid the deed of
chattel mortgage over the vessel "Jean III" for having
been constituted to secure a void or unenforceable
obligation. The complaint was docketed as Civil Case No.
10947 and raffled to Branch 145 of the court.
Meanwhile, on 02 August 1985, Allied Bank filed with the
Ex-Officio Sheriff of Pasig an application for extrajudicial
foreclosure of the real estate mortgage 6 constituted by
the Cheng spouses over their parcel of land covered by
TCT No. (222143) 23843, located in San Juan, Metro
Manila (hereinafter referred to as the San Juan property),
together with the improvement thereon, consisting of a
two-storey building belonging to GCPI. It appears that
said property was mortgaged by the spouses in favor of
Allied Bank on 31 May 1983 to partially secure the
payment of the time loan granted by the Bank to GCPI.
Despite GCPIs full payment of said loan, Allied Bank
refused to release the mortgage on the San Juan
property, theorizing that it also secured the obligation of
the spouses Cheng as Philippine Pacifics co-makers of
the promissory note dated 12 August 1981, in
accordance with the stipulation in the deed of mortgage
extending coverage of the guaranty to "any other
obligation owing to the mortgagee".
On 22 August 1985, the spouses Cheng filed in Civil
Case No. 10947 an amended complaint praying, among
others, that: (a) the promissory note of 12 August 1981
be declared void and unenforceable; (b) the vessel be
declared a total loss; and (c) Allied Bank be ordered to
pay them the value of the loss. And, in order to prevent
Allied Bank and the Ex-Officio Sheriff of Pasig from
foreclosing the real estate mortgage over their San Juan
property, the spouses Cheng filed a supplemental
complaint with an application for a writ of preliminary
injunction. A writ of preliminary injunction was,
thereafter, issued by the trial court.
On 17 October 1985, Allied Bank filed a motion to
dismiss the amended as well as the supplemental
complaints.
In its order of 12 March 1986, the trial court denied the
motion with respect to the amended complaint, for lack
of merit, while deferring the resolution thereof as
regards the supplemental complaint until after trial
because the ground alleged did not appear to be
indubitable.

Eventually, in a decision dated 08 February 1989, 7 the

trial court declared both the promissory note dated 12
August 1981 and the deed of chattel mortgage over the
vessel "Jean III" invalid and unenforceable. Dispositively,
the decision reads:
WHEREFORE, premises considered, the Court renders
judgment declaring both the promissory Note (Exh. "M")
and the Deed of Chattel Mortgage (Exh. "5") not valid
and unenforceable; permanently enjoining defendants
Allied Banking Corporation and the ex-officio sheriff of
Malabon and his deputies, agents and representatives
from proceeding with the foreclosure and auction sale of
the fishing vessel "JEAN III"; permanently enjoining the
defendants-bank and ex-officio sheriff of Pasig from
proceeding with the foreclosure and auction sale of the
plaintiffs real property covered by TCT No. (222143)
23843 including the building thereon owned by Glee
Chemicals Philippines, Inc.; ordering defendant bank to
pay plaintiffs the sum of Four Million Pesos
(P4,000,000.00), Philippine Currency, for the loss of the
aforementioned vessel, the sum of Thirty Thousand
Pesos (P30,000.00), Philippine Currency as moral and
exemplary damages, the further sum of Thirty Thousand
Pesos (P30,000.00), Philippine Currency, as attorneys
fees; and the costs of the suit.
The motion to dismiss the supplemental complaint filed
by defendant is denied for lack of merit.
Finally, within three (3) days from the finality of this
decision, defendant bank is hereby compelled to execute
the necessary release or cancellation of mortgage
covering the aforesaid parcels of land, and deliver the
two torrens titles in its possession to herein plaintiffs.
SO ORDERED.
Therefrom, Allied Bank went to the Court of Appeals (CA)
via ordinary appeal under Rule 41 of the Rules of Court,
which appellate recourse was docketed as CA-G.R. CV
No. 41280.
As stated at the outset hereof, the Court of Appeals, in
its Decision dated 11 December 2001, partially reversed
and set aside the appealed decision of the trial court
insofar as it (a) declared the promissory note as not valid
and unenforceable and (b) ordered Allied Bank to pay
the spouses Cheng the amount of Four Million Pesos
(P4,000,000.00) for the loss of the fishing vessel and the
sum of Thirty Thousand Pesos (P30,000.00) as moral and
exemplary damages. In all other respects, the appellate
court affirmed the trial court, thus:
WHEREFORE, the foregoing considered, the appealed
decision is REVERSED and SET ASIDE insofar as it (1)
DECLARED the Promissory Note dated 12 August 1981
as NOT VALID and unenforceable, and (2) ORDERED
appellant Bank to pay to appellee-spouses Cheng the
amount of Four Million Pesos (P4,000,000.00) for the loss
of the fishing vessel "JEAN III" and the amount of Thirty
Thousand Pesos (P30,000.00) for moral and exemplary
damages. In all other respects, the decision is
AFFIRMED.
SO ORDERED.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

Dissatisfied, Allied Bank immediately filed with this Court

its petition for review on certiorari in G.R. No. 151040,
seeking to set aside and reverse only that portion of the
appellate courts decision which affirmed certain aspects
of the trial courts decision, i.e., (a) enjoining Allied Bank
and the Ex-Officio Sheriff of Pasig from proceeding with
the foreclosure of the Real Estate Mortgage over the San
Juan property; (b) ordering Allied Bank to execute a
release of the same mortgage in favor of the spouses
Cheng; (c) ordering Allied Bank to deliver the two (2)
torrens titles in favor of the spouses; and (d) ordering
Allied Bank to pay attorneys fees and costs. In short,
Allied Bank faults the Court of Appeals for not reversing
the trial courts decision in its entirety. More specifically,
it submits:
In General, THE HONORABLE COURT OF APPEALS
GRAVELY ERRED WHEN IT DID NOT REVERSE AND SET
ASIDE THE DECISION OF THE REGIONAL TRIAL COURT OF
MAKATI CITY, BRANCH 145 IN ITS ENTIRETY.
In Particular, THE HONORABLE COURT OF APPEALS
PATENTLY ERRED WHEN IT UPHELD RESPONDENTS
ASSERTION THAT THE REAL ESTATE MORTGAGE DATED
MAY 31, 1983 CANNOT BE FORECLOSED WITH RESPECT
TO THE OBLIGATION OF PHILIPPINE PACIFIC TO
PETITIONER.
For their part, the spouses Cheng filed with the Court of
Appeals a motion for reconsideration, disputing the
appellate courts pronouncement that the August 12,
1981 promissory note and the deed of chattel mortgage
over the fishing vessel "Jean III" are valid and
enforceable and that the loss of said vessel must be
borne by them. In its resolution of 1 July 2002, the
appellate court denied the motion.
Hence, the spouses Chengs own petition for review on
certiorari in G.R. No. 154109, seeking the reversal and
setting aside of both the appellate courts decision of 11
December 2001 and resolution of 01 July 2002, it being
their submission that said court committed a grave and
serious reversible error in not holding that:
1. the subject Promissory Note is not valid and
enforceable for non-fulfillment of a suspensive condition
and consequently, the Deed of Chattel Mortgage, being
a mere accessory agreement, is likewise not valid and
enforceable in the absence of a valid principal contract;
and
2. the Loss of the mortgaged Fishing Vessel "Jean III"
must be borne by the respondent bank considering that
the vessel was in its possession and control at the time
of the loss.
Per this Courts Resolution dated 20 November
2002,8 the two (2) separate petitions were ordered
consolidated, involving, as they do, the same decision of
the appellate court.
As we see it, the common issues to be resolved are:
I. Whether or not the promissory note dated 12 August
1981 is valid;
II. Whether or not the chattel mortgage over the fishing
vessel "Jean III" can be foreclosed for Philippine Pacifics

failure to comply with its obligation under the promissory

note dated 12 August 1981; and
III. Whether or not the real estate mortgage constituted
over spouses Chengs parcel of land covered by TCT No.
(222143) 23843 [San Juan property] also secured the
spouses obligation as co-makers of the promissory note
dated 12 August 1981.
In justifying its reversal of the trial courts finding that
the validity and effectivity of the promissory note dated
12 August 1981 were conditioned upon the ratification
thereof by the SEC-created management committee in
SEC Case No. 2042, the appellate court explained that
the terms of the subject promissory note are clear and
leave no doubt upon the intention of the parties. On this
score, it ruled that the parole evidence introduced by the
Cheng spouses to the effect that the validity and
enforceability of the note are conditioned upon its
approval and ratification by the management committee
should have been discarded by the trial court, consistent
with the parole evidence rule embodied in Rule 130,
Section 9 of the Rules of Court. 9 Says the appellate court
in its challenged decision:
Instead, We agree with [Allied Bank] that there is no
evidence to support the court a quos finding that the
effectivity of the promissory note was dependent upon
the prior ratification or confirmation of the management
committee formed by the SEC in SEC Case No. 2042.
To begin with, there is nothing on the face of the
promissory note requiring said prior ratification for it to
become valid. Basic is the rule that if the terms of the
contract are clear and leave no doubt upon the intention
of the parties, the literal meaning of its stipulations shall
control (Article 1370, Civil Code; Honrado, Jr. vs. CA, 198
SCRA 326).
This basic rule notwithstanding, the court a quo
admitted in evidence the alleged verbal stipulation made
by [the spouses Cheng] to the effect that the validity of
the promissory note was dependent upon its ratification
by the management committee. Such parole evidence
should not have been allowed as it had the effect of
altering the provisions of the promissory note which are
in clear and unequivocal terms.
Under the parole evidence rule, the terms of a contract
are conclusive upon the parties and evidence which shall
vary a complete and enforceable agreement embodied
in a document is inadmissible (Magellan Manufacturing
Corporation vs. CA, 201 SCRA 106).10 (Words in bracket
ours).
We agree.
The appellate court is correct in declaring that under the
parole evidence rule, when the parties have reduced
their agreement into writing, they are deemed to have
intended such written agreement to be the sole
repository and memorial of everything that they have
agreed upon. All their prior and contemporaneous
agreements are deemed to be merged in the written
document so that, as between them and their
successors-in-interest, such writing becomes exclusive
evidence of the terms thereof and any verbal agreement
which tends to vary, alter or modify the same is not
admissible.11

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

Here, the terms of the subject promissory note and the

deed of chattel mortgage are clear and explicit and
devoid of any conditionality upon which its validity
depends. To be sure, Allied Bank was not a party to SEC
Case No. 2042 where the management committee was
ordered created; hence, it would not be correct to
presume that it had notice of the existence of the
management committee which, incidentally, was still to
be created when the subject promissory note was
executed on 12 August 1981. Notably, while the parties
in SEC Case No. 2042 agreed to form the management
committee on 27 July 1981, it was only on 14 August
1981 when the committee was actually created and its
members appointed. Clearly then, the subject
promissory note was outside the realm of authority of
the management committee. Corollarily, the chattel
mortgage accessory to it is likewise valid.
We thus declare and so hold that Allied Banks
foreclosure of the chattel mortgage constituted over the
vessel "Jean III" was justified. On this score, we also rule
that the loss of the mortgaged chattel brought about by
its sinking must be borne not by Allied Bank but by the
spouses Cheng. As owners of the fishing vessel, it was
incumbent upon the spouses to insure it against loss.
Thus, when the vessel sank before the chattel mortgage
could be foreclosed, uninsured as it is, its loss must be
borne by the spouses Cheng.
We proceed to the third issue. Both the trial court and
the appellate court are unanimous in finding that the
real estate mortgage executed by the spouses Cheng
over their San Juan property to secure the loan of GCPI
cannot be held to secure the spouses obligation as comakers of the promissory note dated 12 August 1981.
We see no reason to depart from the findings of the two
courts below.
Article 2126 of the Civil Code is explicit:
ART. 2126. The mortgage directly and immediately
subjects the property upon which it is imposed, whoever
the possessor may be, to the fulfillment of the obligation
for whose security it was constituted.
The agreement between the Cheng spouses and Allied
Bank as evidenced by the receipt signed by Allied Banks
representative is that the San Juan property shall
collateralize the approved loan of GCPI, thus indicating
the specific loan to be secured and nothing else. To be
sure, the obligation of GCPI was already paid in full.
Hence the real estate mortgage accessory to it was
inevitably extinguished.
All told, we find no reversible error committed by the
appellate court in rendering the assailed 11 December
2001 Decision and subsequent 01 July 2002 Resolution
in CA-G.R. CV 41280.
WHEREFORE, the consolidated petitions are DENIED
and the challenged decision and resolution of the Court
of Appeals AFFIRMED in toto.
SO ORDERED.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

not re-negotiate
petitioner.

the

fixed

lump-sum

price

with

On July 28, 1997, petitioner and respondent signed a

sub-contract10 providing:
(B) Subcontract works.
To carry out complete structural steelworks11 outlined
in the Sub-contract Lump Sum Price [of P44,223,909]12
in accordance with the Main Drawing 13 and
Technical Specifications14 and in accordance with the
Main Contract, all of which are available on Site.
(c) Special Conditions of the Sub-Contract.
xxx
Republic of the Philippines
SUPREME COURT
Manila

xxx

2. Notwithstanding the provisions of Clause 11(4) 15 of the

General Conditions of the Sub-contract, this Subcontract is on a Fixed Lump Sum basis and is not
subject to re-measurement. It is the responsibility of
[respondent] to derive his own quantities for the purpose
of the Lump Sum Sub-contract price. No additional
payments will be made to [respondent] for any errors in
quantities that may be revealed during the Sub-contract
period. (emphasis supplied) 16

THIRD DIVISION
G.R. No. 160972

xxx

March 9, 2010

LEIGHTON CONTRACTORS PHILIPPINES, INC.,

Petitioner,
vs.
CNP INDUSTRIES, INC., Respondent.

xxx

xxx

xxx

Moreover, the contract required respondent to finish the

project within 20 weeks from the time petitioner was
allowed access to the site on June 20, 1997, 17 that is, on
or before November 6, 1997.

DECISION
CORONA, J.:
This petition for review on certiorari 1 assails the May 31,
2000 decision2 and November 20, 2003 resolution3 of the
Court of Appeals (CA) in CA-G.R. SP No. 52090.
In 1997, Hardie Jardin, Inc. (HJI) awarded the contract for
site preparation, building foundation and structural steel
works of its fibre cement plant project in Barangay
Tatalon in San Isidro, Cabuyao, Laguna to petitioner
Leighton Contractors Philippines, Inc.4
On July 5, 1997, respondent CNP Industries, Inc.
submitted to petitioner a proposal to undertake, as
subcontractor, the construction of the structural
steelworks 5 of HJIs fibre cement plant project. It
estimated the project to require 885,009 kgs. of steel
costing P44,223,909.6
On July 15, 1997, petitioner accepted respondents
proposal specifying that the project cost was for the
fixed lump sum price of P44,223,909.7 Respondent
agreed and petitioner instructed it to commence work.
Meanwhile, petitioner revised the fabrication drawings of
several of the structures columns necessitating
adjustments in the designs of roof ridge ventilation 8 and
crane beams.9 Petitioner communicated the said
revisions to respondent on July 16, 1997. Respondent
estimated that the said revisions required an additional
8,132 kgs. of steel costing P13,442,882. However, it did

On July 29, 1997, petitioner paid respondent 10% of the

project cost amounting to P4,422,390.90.18
Thereafter, in a letter dated July 31, 1997, respondent
informed petitioner that, due to the revisions in the
designs of the roof ridge ventilation and crane beams, it
incurred "additional costs" amounting to P13,442,882.
Respondent submitted its weekly progress report
including the progress billing. Petitioner, on the other
hand, paid the billings.
In its August 12, 1997 progress report, 19 respondent
reiterated that the roof ridge ventilation and crane
beams were not included in the scope of work and
consequently were not part of the sub-contract price. It
likewise presented the cost estimates in the progress
report.
Because respondent was unable to meet the project
schedule, petitioner took over the project on April 27,
1998. At the time of the takeover, respondent had
already accomplished 86% of the project 20 for which
petitioner paid P42,008,343.69.21
Thereafter, respondent again asked petitioner to settle
the "outstanding balance" of P12,364,993.94, asserting
that the roof ridge ventilation and crane beams were
excluded from the project cost. Petitioner refused to pay

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

as the July 28, 1997 subcontract clearly stated that the

sub-contract price was a fixed lump sum.
The parties submitted the matter to the Construction
Industry Arbitration Commission (CIAC) for arbitration. 22
The principal issue submitted thereto was whether the
cost of the additional steel used for the roof ridge
ventilation and crane beams was included in the fixed
lump-sum price.
Respondent argued that the proposal it submitted
(accepted by petitioner on July 15, 1997) excluded the
roof ridge ventilation and crane beams as the
fabrications drawings were "clouded" or had not been
finalized when the subcontract was executed on July 28,
1997. Furthermore, respondent claimed that petitioner
approved the cost estimates when Simon Bennett,
petitioners quantity surveyor, signed the August 12,
1997 progress report. This proved that the said portions
were "additional works" excluded from the fixed lumpsum price.
Petitioner, on the other hand, asserted that the
subcontract explicitly included the aforementioned
works in the scope of work. Furthermore, it was not liable
for the "additional costs" incurred by respondent as the
subcontract clearly provided that the project was for the
fixed lump-sum price of P44,223,909. It likewise denied
approving respondents additional cost estimates as
Bennett signed the August 12, 1997 progress report only
to acknowledge its receipt.
The CIAC found that the subcontract was perfected when
petitioner accepted respondents proposal on July 15,
2009. Thus, because the fabrication drawings for the
roof ridge ventilation and crane beams had not yet been
finalized then, the same were deemed "additional works"
not included in the lump-sum price. In a decision dated
March 19, 1999,23 the CIAC rendered judgment in favor
of respondent and ordered petitioner to pay the balance
of the contract price plus additional works, the cost of
arbitration and attorneys fees.

The parties entered into a contract for a piece of work 28

whereby petitioner engaged respondent as contractor to
build and provide the necessary materials for the
construction of the structural steel works of HJIs fiber
cement plant for a fixed lump-sum price of P44,223,909.
The parol evidence rule, embodied in Section 9, Rule 130
of the Rules of Court29 holds that when the terms of an
agreement have been reduced into writing, it is
considered as containing all the terms agreed upon and
there can be, between the parties and their successors
in interest, no evidence of such terms other than the
contents of the written agreement. 30 It, however, admits
of exceptions such as when the parties subsequently
modify the terms of their original agreement.
The scope of work was defined in the subcontract as the
completion of the structural steel works according to the
main drawing, technical specifications and the main
contract.31 Thus, to determine whether the roof ridge
ventilation and crane beams were included in the scope
of work, reference to the main drawing, technical
specifications and main contract is necessary. The main
contract32 stated that the structural steel works included
Drawing Nos. P302-6200-S-405 and P302-6200-S-402. 33
This, according to petitioner and respondent, 34 referred
to the roof ridge ventilation and crane beams. Hence,
the said works were clearly included in the sub-contract
works.
Nevertheless, respondent contends that when Bennett
signed the August 12, 1997 progress report, petitioner
approved the additional cost estimates, in effect
modifying the original agreement in the subcontract.
Respondent therefore claims an exception to the parole
evidence rule.
In contracts for a stipulated price like fixed lump-sum
contracts, the recovery of additional costs is governed
by Article 1724 of the Civil Code. 35 Settled is the rule that
a claim for the cost of additional work arising from
changes in the scope of work can only be allowed upon
the:

Aggrieved, petitioner assailed the CIAC decision via a

petition for review in the CA. 24 Aside from disputing the
CIACs interpretation of the sub-contract, petitioner
likewise argued that the arbitral body disregarded Article
1724 of the Civil Code.25
In a decision dated May 31, 2000, the CA dismissed the
petition and affirmed the CIAC decision in toto.26
Petitioner moved for reconsideration but it was denied in
resolution dated November 20, 2003.27
Hence, this recourse.
Petitioner insists that it was not liable to pay for the
increase in cost due to the adjustments in the design of
the roof ridge ventilation and crane beams. The
subcontract clearly defined the scope of work as the
construction of the structural steel works and stated that
it was for a fixed lump-sum price. Furthermore, assuming
arguendo that the said adjustments were indeed
additional works, petitioner was not liable to pay for
incremental cost since respondent did not observe the
procedure mandated by Article 1724 of the Civil Code.
The petition is meritorious.

(1) written authority from the developer or

project owner ordering or allowing the written
changes in work and
(2) written agreement of parties with regard to
the increase in price or cost due to the change
in work or design modification.
Furthermore, compliance with the two requisites of
Article 1724, a specific provision governing additional
works, is a condition precedent for the recovery. The
absence of one or the other condition bars the recovery
of additional costs. Neither the authority for the changes
made nor the additional price to be paid therefor may be
proved by any other evidence.36
Respondent, in this instance, presented the August 12,
1997 progress report signed by Bennett. However,
respondent knew that Bennett was not authorized to
order any changes in the scope of works or to approve
the cost thereof. It addressed all correspondences
relating to the project to (petitioners) project manager
Michael Dent, not Bennett. 37 Moreover, Bennett did not
sign the subcontract for and in behalf of respondent but

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

only as a witness.38 Respondent was therefore aware of

Bennetts lack of authority.
In this respect, aside from respondents failure to
present the documents required by Article 1724 of the
Civil Code, we find that the sub-contract was never
modified. Petitioner therefore cannot be liable for the
additional costs incurred by respondent.1avvphi1
In a fixed lump-sum contract, the project owner agrees
to pay the contractor a specified amount for completing
a scope of work involving a variety of unspecified items
of work without requiring a cost breakdown. 39 The
contractor estimates the project cost based on the scope
of work and schedule and considers probable errors in
measurement and changes in the price of materials. 40
By entering into a fixed lump-sum contract, respondent
undertook the risk of incurring a loss due to errors in
measurement. The sub-contract explicitly stated that the
stipulated price was not subject to remeasurement.
Since the roof ridge ventilation and crane beams were
included in the scope of work, respondent was presumed
to have estimated the quantity of steel (the minimum
and maximum amount) needed on the said portions
when it made its formal offer on July 5, 1997.
Concomitantly, by the very nature of a fixed lump-sum
contract, petitioner was only liable to pay the stipulated
subcontract price.41
WHEREFORE, the May 31, 2000 decision and November
20, 2003 resolution of the Court of Appeals in CA-G.R. SP
No. 52090 affirming the March 19, 1999 decision of the
Construction and Industry Arbitration Commission are
hereby REVERSED and SET ASIDE. New judgment is
hereby entered declaring that petitioner Leighton
Contractors Philippines, Inc. is not liable for the
additional costs incurred by respondent CNP Industries,
Inc.
SO ORDERED.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

On April 13, 1982, petitioner applied for and was granted

a loan by respondent in the amount of Three Million
Eight Hundred Thousand Pesos (P3,800,000.00) as
evidenced by a Loan Agreement. 4 The loan was intended
for the construction of 160 housing units on a 3.9
hectare property located in Matina Aplaya, Davao City
which was subdivided by petitioner per Subdivision
Sketch Plan.5 To speed up the processing of all
documents necessary for the release of the funds,
petitioner
allegedly
offered
respondent
a
service/commitment fee of P320,000.00 for the
construction of 160 housing units, or at P2,000.00 per
unit. The offer having been accepted, both parties
executed a Memorandum of Agreement 6 (MOA) on the
same date.
As guarantor, the Home Financing Corporation (HFC), a
government entity tasked to encourage lending
institutions to participate in the government's housing
programs, extended security coverage obligating itself to
pay the said loan upon default of petitioner. Out of the
loan proceeds in the amount of P3,800,000.00,
respondent deducted in advance the amount of
P320,000.00 as commitment/service fee.
Unfortunately, petitioner was only able to construct 35
out of the 160 housing units proposed to be constructed
under the contract. In addition, petitioner defaulted in
the payment of its loan obligation. Thus, respondent
made a call on the unconditional cash guarantee of HFC.
In order to recover from HFC, respondent assigned to
HFC its interest over the mortgage by virtue of a Deed of
Assignment7 on August 28, 1983 coupled with the
delivery of the Transfer Certificate of Title.

Republic of the Philippines

SUPREME COURT
Manila

As of August 2, 1983, the outstanding obligation of

petitioner amounted to P3,240,757.99. HFC paid only
P2,990,757.99, withholding the amount of P250,000.00.
Upon payment, HFC executed a Deed of Release of
Mortgage8 on February 14, 1984, thereby canceling the
mortgage of all properties listed in the Deed of
Assignment. Respondent made several demands from
HFC for the payment of the amount of P250,000.00 but
HFC continued to withhold the same upon the request of
petitioner. Thus, respondent filed an action to recover
the P250,000.00 with the RTC, Branch 15, of Davao City,
docketed as Civil Case No. 17048. 9 On April 13, 1987,
said RTC rendered a Decision 10 in favor of respondent,
the dispositive portion thereof reads as follows:

THIRD DIVISION
G.R. No. 162523

November 25, 2009

NORTON RESOURCES AND DEVELOPMENT

CORPORATION, Petitioner,
vs.
ALL ASIA BANK CORPORATION,* Respondent.
DECISION
NACHURA, J.:

IN VIEW WHEREOF, judgment is hereby rendered as

follows:

Before this Court is a Petition for Review on Certiorari 1

under Rule 45 of the Rules of Civil Procedure, seeking
the reversal of the Court of Appeals (CA) Decision 2 dated
November 28, 2002 which set aside the Decision 3 of the
Regional Trial Court (RTC) of Davao City, Branch 14,
dated August 27, 1999.

1. The defendant shall return to the plaintiff the

P250,000.00 with legal interest to be computed
from April 12, 1984 until fully paid.
2. The defendant shall pay the plaintiff fifty
thousand pesos (P50,000.00) as attorneys fees
and P7,174.82 as collection expenses.

The Facts
Petitioner
Norton
Resources
and
Development
Corporation (petitioner) is a domestic corporation
engaged in the business of construction and
development of housing subdivisions based in Davao
City, while respondent All Asia Bank Corporation
(respondent), formerly known as Banco Davao-Davao
City Development Bank, is a domestic banking
corporation operating in Davao City.

3. The defendant shall pay the costs of this

suit.
SO ORDERED.11

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

HFC appealed to the CA which, in turn, sustained the

decision of the RTC. The CA decision became final and
executory.
However, on February 22, 1993, petitioner filed a
Complaint12 for Sum of Money, Damages and Attorneys
Fees against respondent with the RTC, docketed as Civil
Case No. 21-880-93. Petitioner alleged that the
P320,000.00 commitment/service fee mentioned in the
MOA was to be paid on a per-unit basis at P2,000.00 per
unit. Inasmuch as only 35 housing units were
constructed, petitioner posited that it was only liable to
pay P70,000.00 and not the whole amount of
P320,000.00, which was deducted in advance from the
proceeds of the loan. As such, petitioner demanded the
return of P250,000.00, representing the commitment fee
for the 125 housing units left unconstructed and unduly
collected by respondent.

The CA's Ruling

On November 28, 2002, the CA reversed the ruling of the
RTC. The CA held that from the literal import of the MOA,
nothing was mentioned about the arrangement that the
payment of the commitment/service fee of P320,000.00
was on a per unit basis valued at P2,000.00 per housing
unit and dependent upon the actual construction or
completion of said units. The CA opined that the MOA
duly contained all the terms agreed upon by the parties.
Undaunted,
petitioner
filed
a
Motion
for
Reconsideration17 which was, however, denied by the CA
in its Resolution18 dated February 13, 2004.
Hence, this Petition which raised the following issues:
1. WHETHER OR NOT THE MEMORANDU[M] OF
AGREEMENT (MOA) REFLECTS THE TRUE
INTENTION OF THE PARTIES[;]

In its Answer,13 respondent denied that the P320,000.00

commitment/service fee provided in the MOA was broken
down into P2,000.00 per housing unit for 160 units.
Moreover, respondent averred that petitioners action
was already barred by res judicata considering that the
present controversy had already been settled in a
previous judgment rendered by RTC, Branch 15, of
Davao City in Civil Case No. 17048.

2. WHETHER OR NOT HEREIN PETITIONER IS

ENTITLED TO RECOVER THE AMOUNT OF TWO
HUNDRED
[FIFTY]
THOUSAND
PESOS
REPRESENTING THE ONE HUNDRED TWENTY
FIVE (125) UNCONSTRUCTED HOUSING UNITS
AT TWO THOUSAND PESOS (PHP. 2,000.00)
EACH AS AGREED [; AND]

The RTC's Ruling

After trial on the merits, the RTC rendered a Decision 14
on August 27, 1999 in favor of petitioner. It held that the
amount of P320,000.00, as commitment/service fee
provided in the MOA, was based on the 160 proposed
housing units at P2,000.00 per unit. Since petitioner was
able to
construct only 35 units, there was overpayment to
respondent in the amount of P250,000.00. Thus, the RTC
disposed of the case in this wise:
THE FOREGOING CONSIDERED, judgment is hereby
rendered for the plaintiff and against the defendant
ordering the said defendant:
1. To pay the plaintiff the amount of TWO
HUNDRED
FIFTY
THOUSAND
PESOS
(P250,000.00) with interest at the legal rate
reckoned from February 22, 1993, the date of
the filing of the plaintiffs complaint until the
same shall have been fully paid and satisfied;
2. To pay the plaintiff the sum of THIRTY
THOUSAND PESOS (P30,000.00) representing
litigation expenses;
3. To pay the plaintiff the sum of SIXTY TWO
THOUSAND
FIVE
HUNDRED
PESOS
(P62,500.00) as and for attorneys fees; and
4. To pay the costs.
SO ORDERED.15
Aggrieved, respondent appealed to the CA. 16

3. WHETHER OR NOT VICTOR FACUNDO AS THE

VICE PRESIDENT AND GENERAL MANAGER AT
THE TIME THE AFOREMENTIONED MOA WAS
EXECUTED, WAS AUTHORIZED TO ENTER INTO
[AN] AGREEMENT AND TO NEGOTIATE THE
TERMS AND CONDITIONS THEREOF TO THEIR
CLIENTELE.19
Our Ruling
The instant Petition is bereft of merit.
Our ruling in Benguet Corporation, et al. v. Cesar
Cabildo20 is instructive:
The cardinal rule in the interpretation of contracts is
embodied in the first paragraph of Article 1370 of the
Civil Code: "[i]f the terms of a contract are clear and
leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall
control." This provision is akin to the "plain meaning
rule" applied by Pennsylvania courts, which assumes
that the intent of the parties to an instrument is
"embodied in the writing itself, and when the words are
clear and unambiguous the intent is to be discovered
only from the express language of the agreement." It
also resembles the "four corners" rule, a principle which
allows courts in some cases to search beneath the
semantic surface for clues to meaning. A court's purpose
in examining a contract is to interpret the intent of the
contracting parties, as objectively manifested by them.
The process of interpreting a contract requires the court
to make a preliminary inquiry as to whether the contract
before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable
alternative interpretations. Where the written terms of
the contract are not ambiguous and can only be read
one way, the court will interpret the contract as a matter
of law. If the contract is determined to be ambiguous,

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

then the interpretation of the contract is left to the court,

to resolve the ambiguity in the light of the intrinsic
evidence.
In our jurisdiction, the rule is thoroughly discussed in
Bautista v. Court of Appeals:
The rule is that where the language of a contract is plain
and unambiguous, its meaning should be determined
without reference to extrinsic facts or aids. The intention
of the parties must be gathered from that language, and
from that language alone. Stated differently, where the
language of a written contract is clear and unambiguous,
the contract must be taken to mean that which, on its
face, it purports to mean, unless some good reason can
be assigned to show that the words should be
understood in a different sense. Courts cannot make for
the parties better or more equitable agreements than
they themselves have been satisfied to make, or rewrite
contracts because they operate harshly or inequitably as
to one of the parties, or alter them for the benefit of one
party and to the detriment of the other, or by
construction, relieve one of the parties from the terms
which he voluntarily consented to, or impose on him
those which he did not.21
Moreover, Section 9, Rule 130 of the Revised Rules of
Court clearly provides:
SEC. 9. Evidence of written agreements. When the
terms of an agreement have been reduced to writing, it
is considered as containing all the terms agreed upon
and there can be, between the parties and their
successors in interest, no evidence of such terms other
than the contents of the written agreement.
However, a party may present evidence to modify,
explain or add to the terms of the written agreement if
he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake,
imperfection in the written agreement;

or

(b) The failure of the written agreement to

express the true intent and agreement of the
parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by
the parties or their successors in interest after
the execution of the written agreement.
The "parol evidence rule" forbids any addition to or
contradiction of the terms of a written instrument by
testimony or other evidence purporting to show that, at
or before the execution of the parties' written
agreement, other or different terms were agreed upon
by the parties, varying the purport of the written
contract. When an agreement has been reduced to
writing, the parties cannot be permitted to adduce
evidence to prove alleged practices which, to all
purposes, would alter the terms of the written
agreement. Whatever is not found in the writing is
understood to have been waived and abandoned. 22 None
of the above-cited exceptions finds application in this
case, more particularly the alleged failure of the MOA to

express the true intent and agreement of the parties

concerning the commitment/service fee of P320,000.00.
In this case, paragraph 4 of the MOA plainly states:
4. That the CLIENT offers and agrees to pay a
commitment and service fee of THREE HUNDRED
TWENTY THOUSAND PESOS (P320,000.00), which shall
be paid in two (2) equal installments, on the same dates
as the first and second partial releases of the proceeds
of the loan.23
As such, we agree with the findings of the CA when it
aptly and judiciously held, to wit:
Unmistakably, the testimonies of Antonio Soriano and
Victor Facundo jibed in material points especially when
they testified that the P320,000.00 commitment/service
fee mentioned in Paragraph 4 of Exhibit "B" is not to be
paid in lump sum but on a per unit basis valued at
P2,000.00 per housing unit. But a careful scrutiny of
such testimonies discloses that they are not in accord
with the documentary evidence on record. It must be
stressed that both Antonio Soriano and Victor Facundo
testified that the P320,000.00 commitment/service fee
was arrived at by multiplying P2,000.00, the cost per
housing unit; by 160, the total number of housing units
proposed to be constructed by the [petitioner] as
evidenced by a certain subdivision survey plan of
[petitioner] marked as Exhibit "C."
xxxx
Looking closely at Exhibit "C," noticeable are the date of
survey of the subdivision which is May 15-31, 1982 and
the date of its approval which is June 25, 1982, which
dates are unmistakably later than the execution of the
Loan Agreement (Exhibit "A") and Exhibit "B" which was
on April 13, 1982. With these dates, we cannot lose sight
of the fact that it was impossible for Victor Facundo to
have considered Exhibit "C" as one of the documents
presented by [petitioner] to support its proposal that the
commitment/service fee be paid on a per unit basis at
P2,000.00 a unit. x x x.
xxxx
To stress, there is not even a slim possibility that said
blue print (referring to Exhibit "C") was submitted to
[respondent] bank during the negotiation of the terms of
Exhibit "B" and was made the basis for the computation
of P320,000.00 commitment/service fee. As seen on its
face, Exhibit "C" was approved in a much later date than
the execution of Exhibit "B" which was on April 13, 1982.
In addition, as viewed from the foregoing testimony, no
less than Victor Facundo himself admitted that there
were only 127 proposed housing units instead of 160.
Considering these factual milieus, there is sufficient
justification to discredit the stance of [petitioner] that
Exhibit "B" was not reflective of the true intention or
agreement of the parties. Paragraph 4 of Exhibit "B" is
clear and explicit in its terms, leaving no room for
different interpretation. Considering the absence of any
credible and competent evidence of the alleged true and
real intention of the parties, the terms of Paragraph 4 of
Exhibit "B" remains as it was written. Therefore, the
payment of P320,000.00 commitment/service fee
mentioned in Exhibit "B" must be paid in lump sum and
not on a per unit basis. Consequently, we rule that

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

10

[petitioner] is not entitled

P250,000.00.241avvphi1

to

the

return

of

The agreement or contract between the parties is the

formal expression of the parties' rights, duties and
obligations. It is the best evidence of the intention of the
parties. Thus, when the terms of an agreement have
been reduced to writing, it is considered as containing all
the terms agreed upon and there can be no evidence of
such terms other than the contents of the written
agreement between the parties and their successors in
interest. 25 Time and again, we have stressed the rule
that a contract is the law between the parties, and
courts have no choice but to enforce such contract so
long as it is not contrary to law, morals, good customs or
public policy. Otherwise, courts would be interfering with
the freedom of contract of the parties. Simply put, courts
cannot stipulate for the parties or amend the latter's
agreement, for to do so would be to alter the real
intention of the contracting parties when the contrary
function of courts is to give force and effect to the
intention of the parties.26
Finally, as correctly observed by respondent, petitioner's
claim that the MOA is a contract of adhesion was never
raised by petitioner before the lower courts. Settled is
the rule that points of law, theories, issues, and
arguments not adequately brought to the attention of
the trial court need not be, and ordinarily will not be,
considered by a reviewing court. They cannot be raised
for the first time on appeal. To allow this would be
offensive to the basic rules of fair play, justice and due
process.27
A contract of adhesion is defined as one in which one of
the parties imposes a ready-made form of contract,
which the other party may accept or reject, but which
the latter cannot modify. One party prepares the
stipulation in the contract, while the other party merely
affixes his signature or his "adhesion" thereto, giving no
room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. 28 It must be
borne in mind, however, that contracts of adhesion are
not invalid per se. Contracts of adhesion, where one
party imposes a ready-made form of contract on the
other, are not entirely prohibited. The one who adheres
to the contract is, in reality, free to reject it entirely; if he
adheres, he gives his consent.29
All told, we find no reason to disturb, much less, to
reverse the assailed CA Decision.

G.R. no. 171762

June 5, 2009

LYNN MAAGAD and the DIRECTOR OF LANDS,

Petitioners,
vs.
JUANITO MAAGAD, Respondent.
DECISION
PUNO, C.J.:
This petition for review on certiorari1 assails the Decision
of the Court of Appeals (CA) 2 in CA-G.R. CV No. 56663.
The CA reversed and set aside the Decision of the
Regional Trial Court (RTC) 3 of Misamis Oriental, which
dismissed for lack of evidence the Complaint for
Annulment and/or Reconveyance of Title with Damages
filed by herein respondent.
The parcel of land in dispute is Lot No. 6297, Cad-237, C5 (Lot 6297) with an area of five thousand, one hundred
thirty-four square meters (5,134 sq. m.) located in Bulua,
Cagayan de Oro City. Lot 6297 formed part of the estate
of Proceso Maagad. Upon his death sometime in 1963 4 or
1965,5 he was survived by his children Amadeo, Adelo
(father of petitioner Lynn), Loreto and Juanito
(respondent), all surnamed Maagad.
On 20 June 1972, the heirs of Proceso executed an
Extrajudicial Partition of Real Estate (Partition) 6 dividing
among themselves their fathers properties. In the
Partition, Lot 6297 was conveyed to Adelo while Lot No.
62707 was allotted to respondent Juanito.
Respondent Juanito claimed that the Partition mistakenly
adjudicated Lot 6297 to Adelo, and Lot No. 6270 to
himself, when it should have been the reverse. He
asserted that: (1) he had been in continuous possession
of Lot 6297 even before the death of their father,
Proceso; (2) the lot was given to him by their father
when Juanito married in 1952; (3) he had been
religiously paying the realty taxes due the land; and (4)
Adelo, up to his death in 1989, recognized and respected
Juanitos possession and ownership over Lot 6297 and, in
turn, possessed and paid realty taxes for Lot No. 6270.
To rectify the alleged mistake, respondent Juanito and
the children of Adelo, namely: Dina, Ely and petitioner
Lynn, executed on 29 January 1990 a Memorandum of
Exchange which stated in part:

WHEREFORE, the instant Petition is DENIED and the

assailed Court of Appeals Decision is AFFIRMED. Costs
against petitioner.

xxx
2. That the ownership of the parties over the
said properties [is] not absolute considering
the fact that there was a mistake in
designating the owner of the respective
properties. Lot No. 6270 should have been
given to the Party of the Second Part and Lot
No. 6297 should have been allotted to the
Party of the First Part. This wrong designation
was committed in the settlement and partition
of the estate of the late Proceso Maagad.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

3. That the parties herein in order to correct

the foregoing error, do hereby covenanted
and/or agreed to EXCHANGE THE SAID

FIRST DIVISION

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

11

PROPERTIES in such a way that LOT NO. 6270

shall now belong or [be] exclusively owned by
the Party of the Second Par[t], while LOT NO.
6297 shall be owned and belong to the Party of
the First Part. That proper transfer of tax
declarations shall be made in accordance with
this agreement of exchange.8
However, an erroneous assignment of the "Party of the
First Part" and the "Party of the Second Part" resulted in
a repeat of the mistake attendant in the Partition which
the parties had intended to correct. Thus, once again,
Lot 6297 was allotted to the heirs of the now deceased
Adelo while Lot No. 6270 was partitioned to respondent
Juanito. The latter only discovered the error later on in
the year when petitioner Lynn caused the publication of
the Partition in a local newspaper.
Unbeknownst to respondent Juanito, on 15 October
1992, petitioner Lynn, representing his siblings, applied
for a free patent over Lot 6297 with the Bureau of Lands,
Cagayan de Oro City. On 6 January 1993, he wrote
respondent demanding the surrender of the possession
of Lot 6297 which the latter ignored, believing in good
faith that the demand had no basis.
Subsequently, petitioner Lynns free patent application
was approved and Free Patent No. 104305-93-932 was
issued on 4 August 1993. Pursuant thereto, OCT No. P3614,9 in the name of the Heirs of Adelo Maagad
represented by Lynn V. Maagad, was issued and recorded
in the Register of Deeds of Cagayan de Oro City on 10
August 1993.
Thus, on 21 February 1994, respondent Juanito filed a
Complaint for Annulment of Title with Damages before
the RTC, which was later amended to include a prayer for
the alternative relief of reconveyance of title.
Trial ensued. After presentation of the plaintiffs
evidence, then defendant and herein petitioner, Lynn
Maagad, filed a demurrer to evidence alleging that
based on the facts established and the laws applicable
to the case, then plaintiff and herein respondent, Juanito
Maagad, had not shown any right to the reliefs prayed
for.
On 6 March 1997, the RTC granted the demurrer and
dismissed the case for lack of evidence. It ratiocinated,
viz.:
When the heirs of Proceso Maagad executed the Extrajudicial Partition, all the four (4) heirs signed the
document on the agreement that what was adjudicated
to them should now belong to each of them. The
allegation of the witnesses for plaintiff [now respondent]
that Lot No. 6297 was only mistakenly adjudicated to
Adelo Maagad as plaintiffs children were in possession
of the property is belied by the fact that plaintiff signed
the Extra-judicial Partition. Whatever right plaintiff may
have had over the property had been waived by his
signing the document.
It is worthy to note that a Deed of Exchange was
executed at the instance of plaintiff 18 years after the
partition. But still, it is clear under the terms of the
document that Lot No. 6297 belongs to Adelo Maagad
and Lot No. 6270 belongs to Juanito. [The] [p]ertinent

provision of law applicable to the aforestated issue is

Section 9 of Rule 130 which states:
"SECTION 9. Evidence of written agreements. When
the terms of an agreement have been reduced to
writing, i[t] i[s] considered as containing all the terms
agreed upon and there can be, between the parties and
their successors in interest, no evidence of such terms
other tha[n] the contents of the written agreement."
Plaintiff is not allowed to alter the contents of the extrajudicial partition by parol evidence. Parol evidence rule
forbids any addition to or contradiction of the terms of a
written instrument. x x x
Even granting arguendo that there was a mistake in the
extra-judicial partition, plaintiffs evidence still fall[s]
short of justifying the reformation of the instrument. The
testimonies of its witnesses have not proved by clear
and convincing evidence that the alleged mistake did
not express the true intention of the parties.
xxxx
WHEREFORE, premises considered, judgment is hereby
rendered dismissing the above-entitled case for lack of
evidence.10
On appeal, the CA reversed and set aside the ruling of
the RTC, viz.:
WHEREFORE, all the foregoing considered, the appeal is
hereby GRANTED and the assailed decision is REVERSED
AND SET ASIDE. OCT No. P-3614 issued to the Heirs of
Adelo Maagad is hereby declared NULL AND VOID and
plaintiff-appellant declared the rightful owner and
possessor of Lot No. 6297, Cad 237, C-5.11
Hence, this petition for review on certiorari which calls
upon the Court to resolve the following issues: (1)
whether Juanito Maagad has a superior right over Lot
6297; (2) whether OCT No. P-3614, issued pursuant to
the free patent application, should be declared null and
void; and corollarily, (3) whether the title can be
reconveyed to respondent.
On the question of whether respondent Juanito Maagad
has a superior right over Lot 6297, the CA ruled in the
affirmative, viz.:
The records of the case indubitably show that the Deed
of Extrajudicial Partition executed in 1972 between and
among the heirs of Proce[s]o Maagad, namely Adelo,
Juanito, Loreto and Amadeo, contained a patent mistake
by the erroneous adjudication of Lot No. 6297 to Adelo,
herein defendant-appellees [now petitioners] father,
considering that the said lot had long been in the actual
possession of plaintiff-appellant [now respondent],
through his father, and of the adjudication of Lot No.
6270 to plaintiff-appellant when the same had already
been declared in Adelos name.
Consequently, the necessity to rectify the error arose.
Hence, on January 29, 1990, plaintiff-appellant together
with Adelos heirs, including herein defendant-appellee
Lynn, executed a Memorandum of Exchange to conform
to the real intention of the extra-judicial partition. The

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

12

instrument intended to exchange [Lot Nos.] 6297 and

6270; specifically, to transfer Lot No. 6297 from the heirs
of Adelo Maagad to plaintiff-appellant, and in turn, to
effect the transfer of Lot No. 6270 from the latter to the
former. But for reasons beyond the intervention of the
parties, the Memorandum of Exchange reflected the
same mistake, thus, no exchange of property was in
reality effected.
We find, however, that notwithstanding the failure to
effect the exchange of the properties, defendantappellees voluntary and active participation in the
execution of the Memorandum of Exchange clearly
demonstrated his recognition of the mistake in the
instrument of partition. The intent to effect the exchange
in order to correct the defect in the partition was
strongly manifested when defendant-appellee voluntarily
subscribed to the instrument. By his act, the latter is
estopped from negating the existence of the mistake in
the adjudication of the properties and of plaintiffappellants pre-existing rights over Lot No. 6297.
Hence, We find defendant-appellees contention tenuous
that Lot No. 6297 belonged to him and his siblings by
way of inheritance from their father Adelo, who in turn
obtained the same through the Extrajudicial Partition. It
would be highly illogical and absurd for the parties to
execute a Memorandum of Exchange in the first place if
there was nothing to exchange at all, unless the purpose
of said exchange was precisely to rectify and effect the
correct adjudication of the two lots in question. 12
(emphasis added)
The parol evidence rule, 13 as relied on by the RTC to
decide in favor of Lynn Maagad, proscribes any addition
to or contradiction of the terms of a written agreement
by testimony purporting to show that, at or before the
signing of the document, other or different terms were
orally agreed upon by the parties. 14 However, the rule is
not absolute and admits of exceptions. Thus, among
other grounds, a party may present evidence to modify,
explain, or add to the terms of the written agreement if
he puts in issue in his pleading a mistake in the written
agreement. For the mistake to validly constitute an
exception to the parol evidence rule, the following
elements must concur: (1) the mistake should be of fact;
(2) the mistake should be mutual or common to both
parties to the instrument; and (3) the mistake should be
alleged and proved by clear and convincing evidence. 15
We find that all the elements are present in the case at
bar and there was indeed a mistake in the terms of the
Partition, thus exempting respondent Juanito from the
general application of the parol evidence rule.
We agree with the CA that "[i]t would be highly illogical
and absurd for the parties to execute a Memorandum of
Exchange in the first place if there was nothing to
exchange at all, unless the purpose of said exchange
was precisely to rectify and effect the correct
adjudication of the two lots in question." 16 The mere fact
of execution of a Memorandum of Exchange itself
indicates the existence of a mistake in the Partition
which the parties sought to correct. The existence of
such mistake is further cemented with statements in the
Memorandum of Exchange, viz.:
xxx

2. That the ownership of the parties over the

said properties [is] not absolute considering
the fact that there was a mistake in
designating the owner of the respective
properties. x x x
3. That the parties herein in order to correct
the foregoing error, do hereby covenanted
and/or agreed to EXCHANGE THE SAID
PROPERTIES x x x.17 (emphases added)
The strongest evidence of mistake, however, is the
admission by the petitioner himself. In his Petition for
Review on Certiorari, petitioner admits that, because of
mutual mistake, the Memorandum of Exchange failed to
express the agreement of the parties to exchange the
properties. Moreover, he quotes, and agrees with, the
decision of the CA and even refers to the reformation of
the original contract. Petitioner states:
In the case at bar, it became apparent that there was
failure of the Memorandum of Exchange to disclose the
real agreement of the parties brought about by the
mutual mistakes of the parties as reflected in the said
instrument
(Article
1361,
Civil
Code
of
the
Philipp[in]es).18
Thus[,] by reason of the mutual mistake which did not
express the true intent and agreement of the parties
from a prior oral agreement to exchange the property
before they have attempted to reduce it in writing, which
attempt fails by reason of such mistake, hence
reformation enforces the original contract, if necessary.
As aptly quoted from the basic decision, p. 15, thus:
"Hence, WE find defendant-appellees contention
tenuous that Lot No. 6297 belonged to him and his
siblings by way of inheritance from their father, Adelo,
who in turn obtained the same through Extra-judicial
Partition. It would be highly illogical and absurd for the
parties to execute a Memorandum of Exchange in the
first place if there was nothing to exchange at all, unless
the purpose of said exchange was precisely to rectify
and effect the correct adjudication of the two lots in
question.
Indeed there was an attempt to rectify and effect the
correct adjudication of the two lots in question. 19
(emphases added)
It is well-settled that a judicial admission conclusively
binds the party making it. He cannot thereafter take a
position contradictory to, or inconsistent with his
pleadings. Acts or facts admitted do not require proof
and cannot be contradicted unless it is shown that the
admission was made through palpable mistake or that
no such admission was made. 20 In the case at bar, there
is no proof of such exceptional circumstances, nor were
they
even
alleged
or
availed
of
by
the
petitioner.1avvphi1
Therefore, with the mistake in both the Partition and the
Memorandum of Exchange duly shown and admitted, we
agree with the CA that respondent Juanito Maagad has a
superior right over Lot 6297 pursuant to the intended
distribution of properties in the Partition.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

13

We now proceed to the second and third issues of

whether OCT No. P-3614 should be declared null and
void; and corollarily, whether it can be reconveyed to
respondent. The CA held that the certificate of title,
having been issued pursuant to an invalid free patent, is
null and void. Being null and void, it cannot be
reconveyed as it produced no legal effect.

over the said Lot No. 6297. And, being close relatives it
is hoped that you could peacefully turn-over possession
over the said property to Lynn V. Maagad, without
resorting to the costly avenue of litigation.

Again, we agree with the CA.

Very truly yours,

The pertinent provision of the Public Land Act, 21 as

amended by Republic Act No. 6940,22 explicitly states the
requirements for a free patent to be issued, viz.:

(SGD.) ELIZER C. FLORES

Sec. 44. Any natural-born citizen of the Philippines who

is not the owner of more than twelve (12) hectares and
who, for at least thirty (30) years prior to the effectivity
of this amendatory Act, has continuously occupied and
cultivated, either by himself or through his predecessorsin-interest a tract or tracts of agricultural public lands
subject to disposition, who shall have paid the real
estate tax thereon while the same has not been
occupied by any person shall be entitled, under the
provisions of this Chapter, to have a free patent issued
to him for such tract or tracts of such land not to exceed
twelve (12) hectares.

(SGD.) LYNN V. MAAGAD24 (emphases added)

The Order approving the free patent application of

petitioner Lynn, representing the Heirs of Adelo Maagad,
stated that "the applicant ha[d] already complied with all
the requirements of the law for the issuance of patent to
the land."23 As clearly provided by Sec. 44 of the Public
Land Act, the requirements include, among others, that:
(1) the applicant has continuously occupied and
cultivated, either by himself or through his predecessorsin-interest, the tract or tracts of agricultural public lands;
(2) he shall have paid the real estate tax thereon; and
(3) the land has not been occupied by any person.
A perusal of the records clearly shows, however, that
petitioner is not entitled to apply for, much less be
granted, a free patent over Lot 6297. When petitioner
filed his free patent application on 15 October 1992, he
claimed prior, actual, and continuous possession and
cultivation of the lot. Yet such claim is belied by the
letter, dated 6 January 1993, he subsequently sent to
respondent demanding surrender of the possession of
the property. The letter reads:
January 6, 1993
Mr.
Zone
Cagayan de Oro City

Juanito
8,

Maagad
Bulua,

Dear Mr. Maagad,

Please be informed that the parcel of land, Lot No. 6297
which has been occupied by your children situated at
Bulua, Cagayan de Oro City had been the same property
adjudicated in favor of ADELO MAAGAD as per ExtraJudicial Partition of Real Estate executed by and between
the Heirs of Proceso Maagad before Notary Public,
Ricardo A. Tapia per Doc. No. 433, Page No. 88, Book No.
IV, series of 1972.
In this connection, my client, Lynn V. Maagad, one of the
Heirs of Adelo Maagad, desires to recover possession

Anticipating your kind cooperation on the matter.

At my instance:

The letter proves that (1) petitioner Lynn was not in

possession, much less occupation, of Lot 6297; and (2)
he had knowledge that the same was occupied by
another person, contrary to the claims he made when he
applied for the free patent. Moreover, the records show
that it was, in fact, respondent who had possessed,
occupied and cultivated Lot 6297 by planting coconut
trees thereon since around 1950.
Petitioner also claims that he had been religiously paying
the realty taxes due Lot 6297 presenting, as evidence,
Tax Declaration No. 9365-140001 in the name of the
Heirs of Adelo Maagad25 and an Official Receipt. 26 The
claim is again belied by a perusal of the evidence. The
tax declaration and official receipt were issued only on
15 September 1993 and 8 October 1993, respectively,
both after the land title to the subject property had
already been issued on 10 August 1993. In fact, the tax
declaration notes that it was transferred by virtue of
such land title. The records again show that it was
respondent Juanito who had been paying the realty
taxes.
In view of the foregoing, we hold that petitioner Lynn
Maagad committed fraud and gross misrepresentation in
his free patent application. Actual or positive fraud
proceeds from an intentional deception practiced by
means of misrepresentation of material facts, 27 which in
this case was the conscious misrepresentation by
petitioner that he was a fully qualified applicant
possessing all the requirements provided by law.
Moreover, failure and intentional omission of the
petitioner-applicant to disclose the fact of actual physical
possession by the respondent constitutes an allegation
of actual fraud. It is likewise fraud to knowingly omit or
conceal a fact, upon which benefit is obtained to the
prejudice of a third person.28
Petitioner Lynn Maagad was never qualified to apply for
a free patent. Hence, the free patent granted on the
bases of fraud and misrepresentation is null and void.
Consequently, OCT No. P-3614 issued pursuant thereto is
likewise null and void. Being such, it cannot be
reconveyed. Quod nullum est, nullum producit effectum.
That which is a nullity produces no effect.
IN VIEW WHEREOF, the instant petition for review on
certiorari is DENIED. The assailed 7 February 2006
Decision of the Court of Appeals in CA-G.R. CV No. 56663
is AFFIRMED.
Costs against petitioner.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

14

SO ORDERED.

EVIDENCE

RULE 130, SEC. 9 Additional Cases

AGUSTIN, E.P.

15