Article 1355

G.R. No. L-28782 September 12, 1974

AUYONG HIAN (HONG WHUA HANG), petitioner, vs. COURT OF TAX APPEALS,
COLLECTOR OF CUSTOMS, COMMISSIONER OF CUSTOMS, CONSOLIDATED
INDUSTRIES OF THE PHILIPPINES, INC. (CTIP), and LUZON STEVEDORING
CORPORATIONS, respondents.

Facts:

Motion for reconsideration filed by respondent Consolidated Tobacco Industries of the

Philippines, Inc. (CTIP) of the decision in this case promulgated on September 12, 1974 insofar
only as said decision refrains from ruling on the matter of the refund to said respondent of the
storage charges alleged to have been advanced by it in order to secure the release of the
tobacco sold to it at the public auction sale thereof after having been seized and confiscated by
the government, the same having been illegally imported, as ruled in the very decision in this
case, and directs that said matter be prosecuted administratively. It is prayed that such directive
be withdrawn and that the Court itself decide the issue of whether or not movant is entitled to
said refund.

Issue:

1. The fundamental issue to be resolved boils down to what is the proper construction that

should be given to Section 2605 of the Tariff and Customs Code which provides as follows:

Sec. 2605. Disposition of Proceeds. —The following charges shall be paid from the proceeds

of the sale in the order named:

a. Expenses of appraisal advertisement and sale. b. Duties except in the case of

abandoned and forfeited articles.

b. Taxes and other charges due the Government.

c. Government storage charges.

e. Arrastre and private storage charges.

f. Freight, lighterage or general average, on the voyage of importation, of which due

notice shall have been given to the Collector.

2. Whether or not movant Consolidated Tobacco Industries of the Philippines, Inc. is entitled to
refund.
Held:

1. In connection with the tobacco herein involved, in the letter of the Collector of Customs dated February
25, 1970 addressed to the Solicitor General, it was expressly admitted that "Under Section 2605-e of the
same Code (the Customs and Tariff Code) expenses for the storage is deductible from the proceeds from
the sale of the tobacco.” We are of the considered opinion that the section of the Customs and Tariff Code
cited cannot have any other intent. This must be so because until after goods sold by the Bureau of
Customs in an auction sale shall have been delivered either actually or constructively to the winning
bidder, ownership thereof remains with that office. Such is the unequivocal provision of Article 1477 of
the Civil Code which says, "The ownership of the thing sold shall be transferred to the vendee upon the
actual or constructive delivery thereof. “ Accordingly, it is but logical and proper that, unless otherwise
expressly stipulated, all expenses incurred for the preservation and keeping or storage of the goods sold
should becovered by the Bureau until their actual or constructive delivery to the buyer. Relatedly,
Condition No. 8 of the Notice of Sale provides that "Storage fees shall be imposed on article awarded but
not claimed within ten (10) days from the date of approval of the sale." To Our mind, this provision,
indicates that responsibility for storage fees would pass to the buyer only upon the occurrence of the
contingency so stated and not earlier. Movant did claim the tobacco it had purchased within the ten-day
period stipulated the Bureau of Customs was the one not ready to comply.

2. The Government contends also that it would not be equitable to make the Bureau of Customs
hable for the refund demanded by movant, since the auction sale netted only P1.5 M, whereas if
the importation were allowed in 1961, the Government would have realized not less than P3 M.
The argument is not persuasive, if only because the Court has precisely found the importation to
be illegal We cannot see how any consideration of inequity can be predicated on the hypothesis
that something judicially declared illegal was legal Quite the other way around, the stand of the
Government is what appears to be inequitable, for whereas, the amount of P1.5 M paid by
movant fully covers all the items enumerated in Section 2605, including the amount paid by
movant for private storage fees, still the Government refuses to refund movant, notwithstanding
that the provisions just cited expressly ordains that the said amount for storage fees is
deductible from the accepted bid price. In effect, the Government is trying to unjustly enrich
itself at the expense of movant.

IN VIEW OF ALL THE FOREGOING, the decision of this Court in the above-entitled case of
September 12, 1974 is hereby modified only in the sense that the administrative remedy therein
suggested for the refund of storage fees above discussed is hereby declared unnecessary and
the Collector of Customs and/or the Commissioner of Customs are hereby ordered to refund to
movant Consolidated Tobacco Industries of the Philippines, Inc. CTIP the amount of Eight
Hundred Twenty-Three Thousand Seven Hundred Sixty-Eight Pesos and Twenty Centavos
(P823,768.20) paid by said movant to Luzon Stevedoring Corporation on September 13, 1967,
without interest.

Chapter 3: Forms of Contracts

Article 1359

G.R. No. L-39592 January 28, 1975

The Spouses ANTONIO JAYME and ANA SOLIDARIOS, petitioners, vs.Hon. Judge
NESTOR ALAMPAY and BENITO ONG, respondents.

Facts:

Spouses Antonio Jayme and Ana Solidarios (petitioners) filed a complaint against Benito Ong
for reformation of instrument and praying that the deed of sale of the parcel of land executed by
them on December 24, 1964 in favor of Ong which did not embody their true agreement be
reformed and declared a contract of mortgage and that their property be returned to them upon
payment of the loan consideration of P16, 500 and that they be awarded damages.

According to the petitioners, they entered into an agreement with Ong whereby they agreed that
they will borrow from Ong the sum of P16, 500 on the security of their parcel of land. Ong
agreed to their request on the condition that petitioners would execute in his favor a deed of
sale.

Petitioners executed the said deed of absolute sale in favor of Ong for the reason that they
reposed great confidence in him being a good family friend and since they were in dire need of
money. (Gi-ilad ra judsilani Ong).

Simultaneous to the execution of the deed of sale, Ong executed in favor of petitioners an
option to repurchase the parcel of land for 6 months for the same sum of P16, 500.

When the time came when petitioners were willing and ready to pay Ong the loan, the latter
unjustly refused to execute the proper document of mortgage and accept petitioners’ payment of
their loan to him. Hence, petitioners filed this complaint.

Ong filed his answer with counterclaim and raised the defense of prescription. He was however
directed by the court to raise the defense of prescription in his motion to dismiss.

Trial court granted Ong’s motion to dismiss. No evidence on the issue of prescription was
received by trial court at the hearing of the motion to dismiss. The court merely relied on the
allegation of the complaint and the pleadings. Trial court dismissed the complaint on the
following grounds:

• The proper remedy of petitioners should have been the annulment of the sale on the ground
of vitiated consent which action has prescribed within the 4-year period citing Art. 1391 of
the Civil Code.
• The existence of a mortgage executed by Ong in favor of Jose del Castillo (3rd party) who is
a mortgagee in good faith presents a legal impediment to petitioners’ action for reformation
and recovery of the property free from all liens and encumbrances.
Issue:

1. WON the action for reformation of the instrument by petitioners has prescribed?

2. WON trial court’s other ground for dismissal (presence of mortgagee in good faith) was
correct?

Held

1. The action for reformation of instrument by petitioners has not prescribed since the applicable
prescription period on actions based upon written contract and for reformation thereof as
provided by law is 10 YEARS as provided in Article 1144, Civil Code.

Respondent court manifestly erred in holding that petitioners' action prescribed four years after
the execution of the questioned deed of sale on the premise of its unsupported prejudgment in
its dismissal order (without trial and evidence) that "the ultimate agreement of the parties (was)
for the definite sale and conveyance (of the property)". The counter-theory of respondent that
the questioned contract was in truth a bona fide sale is clearly a matter of defense, which was
yet to be established at the trial and could not be availed of at the pre-trial stage to dismiss the
case as if it were already a proven fact.

Respondent court instead of disregarding, should have adhered to the established rule that in
motions to dismiss, the allegations of the complaint are deemed to be hypothetically admitted.
Here, the complaint for reformation of instrument clearly alleged that the deed of sale did not
express the true agreement of the parties and should be reformed into the mortgage that it
actually was and prayed that petitioners be allowed to redeem the property by repaying the loan
of P16,500.00 (the true value of the property being much more, as evidenced by the mortgage
loan for P100,000.00 which respondent in turn secured on it). Such allegations are binding for
purposes of the dismissal motion.

The right to reformation is expressly recognized in Art. 1365, Civil Code: “If two parties agree
upon the mortgagee or pledge of real/personal property but the instrument states that the
property is sold absolutely or with a right to repurchase, reformation of the instrument is proper.”

2. The trial court’s other ground for dismissal is not correct since the mortgagee’s rights over the
property would not defeat petitioners’ action for reformation and recovery of title to the property.
If petitioners prevail, they can recover the title to the property subject to the mortgage thereon in
favor of del Castillo or respondent Ong may be duly sentenced to “deliver the title to the
petitioners free from any encumbrances including the mortgage”. This means that respondent
Ong is obliged to discharge del Castillo’s mortgage credit (which mortgage loan he obtained
after all for his won exclusive benefit).
Chapter 4: Reformation of Instruments

Article 1361

G.R. No. L-1724 October 12, 1950

NIEVES VDA. DE GONZALES DE MONDRAGON, plaintiff-appellant, vs. ROMAN SANTOS,

defendant-appellee.

Facts:

It appears that Don Joaquin Gonzales Mondragon, who died on December 16, 1940 in Manila,
left a large tract of land known as Hacienda Esperanza, situated in three municipalities of
Pangasinan and covered by five certificates of titles. The deceased had executed a will and
codicil in which he provided for the distribution and disposition of his estate among his widow,
Doña Nieves BalmoriVda. de Gonzales Mondragon, the plaintiff herein, and various children. To
his widow, the testator devised 33/34 of the hacienda, among other legacies.

In 1941, the widow and her children made a partition of the inheritance, allotting to each heir
separate and specific portions but leaving pro-indiviso the residential lots and roads in the
barrios situated within the estate. They employed a surveyor, and a sub-division plan,
introduced in evidence as Exhibit 10, was drawn, on which the area of the widow’s
approximately one-third share was stated to be 1,023 hectares.

Subsequent to the partition, negotiations were started, or resumed, for the purchase by Don
Roman Santos, the defendant, of the plaintiff’s share and those of her children who were willing
to sell. Offers and counter-offers were made until, finally, the parties closed the deal and
executed the deed.

Sometime after the sale, a new survey was made and the new plan gave the area of the
plaintiff’s approximately one-third share of the hacienda as 1,091.24 instead of 1,023.

It was the restoration of the difference between these two figures or the payment of its
equivalent in cash that the first complaint was filed, it being alleged that the plaintiff had sold her
land on the basis of P450 per hectare. Explaining why she signed the deed without objecting to
the form in which it was written, the plaintiff declared that she did not read the document
because she was then sick suffering from a heart ailment. The defendant countered with the
allegation that he bought all the plaintiff’s right and interest to and in the hacienda for lump sum
and not for a specified price for each hectare, as the plaintiff claims.

The last preceding paragraph states in a nutshell the pivotal issue, the resolution of which will
decide the rest, except the question as to the inclusion or non-inclusion in the sale of lot No.
4397-A and barrio lots and roads, question will be taken up separately.
It is admitted that if the contract is to be construed by the language used in the deed of
conveyance, the plaintiff can not recover. It is also admitted that “as a general rule, by virtue of
section 22 of Rule 123 of the Rules of Court, Exhibit A may be considered as containing the real
agreement between the parties.”

Issue:

Whether or not contended that “Exhibit A does not express the true intent and agreement of the
parties therein and that the appellant’s consent thereto was given through mistake and error,” in
that she believed “that in signing that deed she was conveying 1,023 hectares only.”

Held:

The plaintiff has the burden of proof to overcome the strong presumption that the document she
and her co-sellers signed, expressed their true intention. Our view of the plaintiff’s evidence is
that it is neither predominant nor conclusive. The best that can be said in its favor is that it does
not rule out the opposite theory. Much less does it establish, in order to show that the mistakes
was mutual, that the buyer shared the vendor’s intention and belief that the sale was by the
hectare and not for a sum in gross as stated in the document of sale.

The plaintiff’s evidence being as it is, the integrity of the document Exhibit A will, of necessity,
have to be maintained and equitable relief denied. This would be true even if there were doubts.
Decisions of this court and of American courts abound in favor of the salutary doctrine that
contracts solemnly and deliberately entered into may not be overturned by inconclusive proof or
by reason of mistakes of one of the parties to which the other in no way has contributed.

Moran’s comments on the Rules of Court, Vol. III, p. 195, summing up the rulings laid down in
various decisions of the court and one of the United States Supreme Court, says: “Relief by way
of reformation of a written agreement will not be granted unless the proof of mutual mistake is of
the clearest and most satisfactory character. The amount of evidence necessary to sustain a
prayer for relief where it is sought to impugn a fact in a document is always more than a mere
preponderance of the evidence.”

It is to be noted that in the last-cited case, the mistake was caused, intentionally or innocently,
by the agent of the plaintiff who was favored by the shortage, whereas in the case at bar the
error was in the plain of the plaintiff herself who was prejudiced by the excess.

The judgment dismissing the complaint will be affirmed with costs.

Article 1362

G.R. No. L-29512 January 17, 1929

ONG CHUA, plaintiff-appellee, vs. EDWARD CARR, ET AL., defendants-appellants.

FACTS

In 1923, Ong Chua bought four properties of the spouses Henry E. Teck and Magdalena Lim.
Chua executed a public document granting the spouses the right to repurchase within four
years. But neither one of the documents was placed on record with the register of deeds.

In 1925, Edward Carr came to Atty. P.J. Moore for advice and assistance in the former’s desire
to purchase coconut lands. Later, Moore informed Carr that he could buy the lots purchased by
Chua from the spouses Teck and Lim.

After long negotiations, Chua agreed to sell the properties in question to Carr on the condition
that the sale should be subject to the rights of Teck and Lim to reconvey the properties, and that
said rights were to be respected by the vendee.

However, Atty. Moore told Carr that they would make the deed of sale to appear absolute, but
that Carr was to bear in mind that the rights of Teck and Lim still existed, and that the deed and
other documents must be left in Moore's possession until the expiration of the term for the right
of repurchase.

Hence, the deed of sale did not include therein the condition that the sale was subject to Teck's
and Lim's rights to repurchase. The deed was signed by Chua, who was unfamiliar of English,
trusting Atty. Moore that such public document contained sufficient conditions as agreed.

In 1926, Atty. Moore got critically ill. While the Atty. was under medical treatment, Carr annoyed
the former. Carr demanded the Atty. to surrender the deed to him for registration to the register
of deeds.

Teck offered to repurchase the property in question from Chua who thereupon demanded of
Carr the reconveyance of the property to the spouses. But Carr refused to do so, claiming that
he had an absolute title to said property.

Upon learning that the deed in question contained no reference to the rights of reconveyance,
Chua filed an action to reform the deed of the sale in accordance with the original agreement.
Subsequent to his answer, Carr died. He was substituted by the administrator of his estate,
Manuel Igual.

The CFI Zamboanga rendered the judgment in favor of Chua.

On appeal, Igual argued that the facts proven did not justify the reformation of the deed in
question.

Issue
Whether or not the petitioner performs a fraudulent conduct and unfair advantage over Chua to
cause for the reformation of the deed.

Held:

YES, the Court holds that the evidence is conclusive that the conduct of Carr constituted fraud
and was calculated to obtain an unfair advantage over Chua.

Under Art. 1362, reformation will be given "where there is a mistake on one side and fraud or
unfair dealing on the other".

In the case at bar, Carr knew the contents of the deed and fully agreed to Moore's plan to place
it in escrow until the expiration of the term for the repurchase or redemption of the land. But he
violated his own agreement when he harassed Moore into giving him possession of the deed
prematurely. He took immediate advantage of that circumstance and hastened to have the
document presented to the register of deeds for the issuance of certificates of title. Hence, such
conduct constitutes fraud and was calculated to obtain an unfair advantage over the plaintiff.

Article 1369

G.R. No. 158560 August 17, 2007

FRABELLE FISHING CORPORATION, Petitioner, vs. THE PHILIPPINE AMERICAN LIFE

INSURANCE COMPANY, PHILAM PROPERTIES CORPORATION and PERF REALTY
CORPORATION, Respondents.

Facts:

On 8 May 1996, respondents entered into a MOA [1996 MOA] agreeing to contribute cash,
property, and services to construct and develop Philamlife Tower, a 45-storey office
condominium. On 6 December 1996, respondents assigned [1996 DOA] to Frabelle Properties
Corporation their rights and obligations under the 1996 MOA with respect to the construction,
development, and ownership of Unit No. 38-B at the 38th floor. They stipulated that the
assignee shall be deemed a co-developer of the construction of Unit No. 38-B.

Frabelle, in turn, assigned to petitioner [Frabelle Fishing] its rights, obligations and interests over
Unit No. 38-B. On 9 March 1998, petitioner and respondents executed a MOA [1998 MOA] to
fund the construction of designated office floors in Philamlife Tower. However, petitioner
discovered respondent’s material concealment of certain details in the 1996 DOA and 1998
MOA, and their gross violation of their contractual obligations as developers, to wit: (a) the non-
construction of a partition wall between Unit No. 38-B and the rest of the floor area; and (b) the
reduction of the net usable floor area from 468 sq.mt. to only 315 sq.mt.
On 11 February 2002, petitioner filed with HLURB a complaint for reformation of instrument and
specific performance against respondents claiming that the contracts do not reflect the true
intention of the parties, and that it is a mere buyer and not co-developer or co-owner of the
condominium unit. On 14 May 2002, HLURB denied respondents’ plea for the case’ outright
dismissal. Respondents then went to CA via petition for prohibition with prayer for TRO claiming
that HLURB has no jurisdiction over the controversy and that the contracts between the parties
provide for compulsory arbitration.

On 2 December 2002, the CA granted respondent’s petition by dismissing the complaint. It held
that HLURB has no jurisdiction over an action for reformation of contracts, and that jurisdiction
lies with the RTC. Petitioner moved to reconsider but was denied on 30 May 2003. Hence, the
instant petition for review on certiorari.

Issue

1. Whether or not HLURB has jurisdiction over complaint for reformation of instruments, specific
performance and damages.

2. Whether or not the parties should initially resort to arbitration.

Held:

Petition is Denied.

1.NO. Jurisdiction is in RTC. As the records show, the complaint filed by petitioner with the
HLURB is one for reformation of instruments. Petitioner claimed that the terms of the contract
are not clear and prayed that they should be reformed to reflect the true stipulations of the
parties. Petitioner prayed:

WHEREFORE, in view of all the foregoing, it is respectfully prayed of this Honorable Office that
after due notice and hearing, a judgment be please rendered:

2. YES. With regard to the second and last issue, paragraph 4.2 of the 1998 MOA mandates
that any dispute between or among the parties "shall finally be settled by arbitration conducted
in accordance with the Rules of Conciliation and Arbitration of the International Chamber of
Commerce." Petitioner referred the dispute to the PDRCI but respondents refused to submit to
its jurisdiction.

It bears stressing that such arbitration agreement is the law between the parties. They are,
therefore, expected to abide by it in good faith.

This Court has previously held that arbitration is one of the alternative methods of dispute
resolution that is now rightfully vaunted as "the wave of the future" in international relations, and
is recognized worldwide. To brush aside a contractual agreement calling for arbitration in case
of disagreement between the parties would therefore be a step backward.
Chapter 5: Interpretation of Contracts

Article 1370

G.R. No. L-25931 October 30, 1978

ROBERTO LABASAN, AVELINO LABASAN, JOSEFINA LABASAN, and MARCELA

COLOMA, petitioners, vs. ADELA LACUESTA, DOMINGA LACUESTA and NORBERTO
LACUESTA, respondents.

Facts:

Spouses Lacuesta were the owners of an unregistered, irrigated riceland in Ilocos Norte. They
conveyed by means of a written document the land with the right to repurchase after 10 years.
They failed to exercise their right within the stipulated period.

They filed a petition seeking the reconveyance of the parcel of land, allegedly as security for a
loan. The trial court ruled that the document executed by the Lacuestas was a pacto de retro
sale and that they lost their right to redeem the land for not having taken any step within the
agreed 10 years.

On appeal, the Court of Appeals set aside the judgement of the trial court and declared the
contract an equitable mortgage and ordered the Labasans to reconvey the land, and that the
loan by the Lacuestas be deemed paid from the fruits of the property which the Labasans had
been receiving for the past 32 years.

Issue:

Whether or not the contract is a pacto de retro sale or an equitable mortgage.

Held:

The contract is an equitable mortgage. It is a basic fundamental rule in the interpretation of a

contract that if the terms thereof are clear and leave no doubt upon 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
(Article 1370, NCC).

In case of doubt concerning the surrounding circumstances in the execution of a contract, the
least transmission of rights and interest shall prevail if the contract is gratuitous, and if onerous,
the doubt is to be settled in favor of the greatest reciprocity of interest.
Article 1371

G.R. No. L-28135 September 10, 1981

JOSE MATIENZO, plaintiff-appellant, vs. MARTIN SERVIDAD, defendant-appellee.

Facts:

Defendant Martin Servidad is the owner of a sixteen hectare agricultural land, which he, and the
plaintiff Jose Matienzo, executed a private instrument 1 handwritten in the dialect of the locality
by FelizaServidad, wife of defendant Martin Servidad, 2 and translated into English, which
includes The conditions for clearing the land are these: “With respect to all your plants we will
share no percentage for the land. But you will have to plant coconut in our land.

We will not pay as this is our conditions. You are free to clear and plant the land as long as you
wish. We must help one another for our betterment. Let us not do anything prejudicial to others.
Let's do the best as it is better.”

Subsequently, the parties entered into another agreement concerning the conditions of copra
making and upland planting. This was again handwritten in the local dialect by FelizaServidad.
The English translation of the agreement reads: “All those that we are to plant no share will be
taken for the land, but we are also to plant coconut, coffee, abaca, and the owner shall not pay
the same.”

On January 30, 1964, defendant wrote plaintiff telling him not to "interfere with the plants" as
they had no agreement yet for that year, and that being the land-owner, he should be the one to
decide in accordance with the "tenancy law". On March 4, 1964, defendant sent another letter to
plaintiff prohibiting him from planting and clearing the land for the same reason. Plaintiff sought
the assistance of the Office of the Agrarian Counsel. Efforts to settle the case amicably failed,
as a consequence of which, plaintiff brought an action against defendant in the Court of
Agrarian Relations, praying that defendant be held guilty of illegal ejectment; that in view of the
strained relationship with defendant, he was waiving his right to reinstatement provided he be
paid reasonable compensation for his improvements.

The case was heard by Judge Valeriano A. Del Valle, then by Judge Agustin Frivaldo and
terminated by Commissioner Benjamin G. Fernandez, who was appointed by the Court to hear
the case on, with the consent of the parties.

Plaintiff moved for reconsideration, but this was denied. In its judgment, the Court a quo
specifically made a finding that plaintiff had expressly waived his right to reinstatement "on
account of his strained relationship with defendant."

Plaintiff appealed to the Court of Appeals, which Court, however, as hereinabove stated,
certified the case to us on the theory that "where the issue is the construction or interpretation of
contracts, or where an the facts are stated in the judgment and the issue is the conclusion
drawn therefrom the question is one of law reviewable by the Supreme Court".

Issue:

Whether or not the plaintiff was made an overseer of defendant, not a tenant.

Held

To start with, a few basic principles on the interpretation of contracts should be reiterated. When
there is no doubt as to the intention of the contracting parties, its literal meaning shall control. It
is clear from the given fact that the plaintiff was made an overseer of defendant, not a tenant. lt
was likewise expressly stipulated therein that "the conditions for clearing the land are these:
With respect to all your plants we will share no percentage for the land." And again, "all those
(coconuts) that we are to plant no share will be taken for the land. The basic element of sharing
in agricultural tenancy, therefore, is absent. The onethird share plaintiff received from copra-
making constituted payments for the processing of copra. These are evidenced by receipts.
Plaintiff also got paid for clearing the coconuts as shown.

A tenant is defined under section 5(a) of Republic Act No. 1199 as a person who, himself, and
with the aid available from within his immediate household, cultivates the land belonging to or
possessed by another, with the latter's consent for purposes of production, sharing the produce
with the landholder under the share tenancy system, or paying to the landholder a price certain
or ascertainable in produce or in money or both, under the leasehold tenancy system. From the
above definition of a tenant, it is clear that absent a sharing arrangement, no tenancy
relationship had ever existed between the parties.

Article 1375

G.R. No. L-439 November 11, 1901

GERMANN & CO., plaintiff-appellees, vs. DONALDSON, SIM & CO., defendants-appellants.

Facts:

This is an incident of want of personality of the plaintiff's attorney. The action is to recover a sum
claimed to be due for freight under a charter party. It was brought by virtue of a general power
for suits, executed in Manila October 27, 1900, by Fernando Kammerzell, and purporting to be a
substitution in favor of several attorneys of powers conferred upon Kammerzell in an instrument
executed in Berlin, Germany, February 5, 1900, by Max Leonard Tornow, the sole owner of the
business carried on in Berlin and Manila under the name of Gemann& Co. The first-named
instrument was authenticated by a notary with the formalities required by the domestic laws.
The other was not so authenticated. Both Tornow and Kammerzell are citizens of Germany.
Tornow is a resident of Berlin and Kammerzell of Manila.

The defendants claim that the original power is invalid under article 1280, No. 5, of the Civil
Code, which provides that powers for suits must be contained in a public instrument. No claim is
made that the document was not executed with the formalities required by the German law in
the case of such an instrument. In support of this contention reliance is placed upon article 1713
of the Civil Code, by which it is provided that "an agency stated in general terms only includes
acts of administration," and that "in order to compromise, alienate, mortgage, or to execute any
other act of strict ownership an express commission is required."

The defendants also claim that the original power cannot be construed as conferring upon
Kammerzell authority to institute or defend suits, from which contention, if correct, it would of
course follow that the delegated power is invalid.

Issue:

Whether or not the Article 1280 ang Article 1713 will apply

Held:

We should not be inclined to regard in institution of a suit like the present, which appears to be
brought to collect a claim accruing in the ordinary course of the plaintiff's business, as properly
belonging to the class of acts described in article 1713 of the Civil Code as acts "of strict
ownership." It seems rather to be something which is necessarily a part of the
mereadministration of such a business as that described in the instrument in question and only
incidentally, if at all, involving apower to dispose of the title to property.

But whether regarded as an act of strict ownership or not, it appears to be expressly and
specially authorized by the clauseconferring the power to "exact the payment" of sums of money
"by legal means." This must mean the power to exact thepayment of debts due the concern by
means of the institution of suits for their recovery. If there could be any doubt as tothe meaning
of this language taken by itself, it would be removed by a consideration of the general scope
and purpose ofthe instrument in which it occurs. (See Civil Code, art. 1286.) The main object of
the instrument is clearly to makeKammerzell the manager of the Manila branch of the plaintiff's
business, with the same general authority with reference toits conduct which his principal would
himself possess if he were personally directing it. It cannot be reasonably supposed,in the
absence of very clear language to that effect, that it was the intention of the principal to withhold
from his agent apower so essential to the efficient management of the business entrusted to his
control as that to sue for the collection ofdebts.
Article 1377

G.R. No. L-12181 September 30, 1959

LUCIO R. ILDEFONSO, plaintiff-appellant, vs. ERNESTO Y. SIBAL, defendant-appellee.

Facts

On October 15, 1953 in Civil Case No. 15371 of the Court of First Instance of Manila,appellant
Lucio R. Ildefonso and appellee Ernesto Y. Sibal, plaintiff and defendanttherein, respectively,
reached a compromise agreement and thereafter filed a jointmotion to dismiss the case. Acting
upon the motion the court granted it and dismissedthe case.

Compromise agreement, which was later reduced to writing but was not presented to the court
for approval, reads:

COMPROMISE AGREEMENT

For and consideration of the mutual covenants herein set forth, the parties hereinabove
named agree:

1. That the plaintiff agrees to dismiss the above-entitled case on the ground of
amicablesettlement, this Compromise Agreement, on the consideration of the promise and
covenant ofthe defendant, to wit:

2. That the defendant promises and covenants that:

a. That the defendant shall pay the plaintiff this date the amount of ONE
THOUSAND(P1,000.00) PESOS;

b. That the defendant promises that within two (2) years from the date hereof, he
shallcourse through the plaintiff as Realtor the former's real estate purchase or
transaction andshould he (defendant) fail thereof, that is, to make such real
estate purchase and to course thesame to the plaintiff as said Realtor, the
defendant is liable further to pay the plaintiff anadditional sum of TWO
THOUSAND (P2,000.00) PESOS.

c. That the defendant further agrees to dismiss his Counterclaim in the above-
entitledcase on the ground of his amicable settlement.

Ildefonso then offered to sell to Sibal at various times during the stipulated period the Great
Eastern Hotel for P1,300,000.00, the Borja Building for P1,500,000.00 and a lot along Rizal
Avenue with an area of 157 square meters for P190,000.00. Defendant, however, told plaintiff
that he could not buy any of the properties being not only beyond his means to buy but also
inappropriate or inadequate to his business.

On April 20, 1956 Ildefonso alleged that defendant Sibal has failed and neglected to make the
purchase of real estate as promised in the compromise agreement within the two-year period
stipulated therein, instituted the present action for the recovery of the penalty in the amount of
P2,000.00, with legal interests thereon from October 16, 1955, plus attorney's fee and costs.

Sibal admitted the execution of the compromise agreement but denied liability, alleging that
under the said agreement his liability may arise only in the event that he buys or sells real estate
without coursing the same through the plaintiff and that his failure to buy or sell real estate in
accordance with the agreement was entirely due to plaintiff’s inability to sell the lands he
(defendant) offered for sale and to obtain real propertieswhich would be profitable for him to
purchase and suitable to his business.

After trial, the lower court, on December 13, 1956, rendered judgment absolving
defendant from the complaint and ordering plaintiff to pay the former the amount of P500.00 as
attorney's fee. From that decision plaintiff has taken the present appeal.

Issue:

Whether or not the defendant has violated the obligation imposed on him by the compromise
agreement.

Held:

NO. It is appellant's contention that under paragraph 2(b) of the compromise agreement,
defendant appellee was under obligation to make a real estate purchase through appellant as
realtor within a period of two years from October 15, 1953, when the agreement was signed,
and his failure to make any such purchase made him liable to pay the penalty of P2,000.00
provided therein. The contention cannot be sustained. There is nothing in the disputed
paragraph of the compromise agreement that can be construed to mean that appellee bound
himself to purchase real property and to pay penalty of P2,000.00 in case he failed to do so.

The paragraph of the agreement in question simply provides, "that the defendant (herein
appellee) promises that within two years from the date hereof, he shall course through the
plaintiff (herein appellant) as Realtor the former's real estate purchase or transaction", and
should appellee fail to fulfill that obligation he becomes liable to pay appellant the sum of
P2,000.00 in accordance with the penal clause. There's no dispute also that appellee has, in
fact, during the two-year period provided in the compromise agreement was not able to
purchase or to sell any real property through appellant (or anybody else, for that matter.
Lastly, the ambiguity in the provision of the compromise agreement in question as a result of the
explanatory clause ("that is, to make such real estate purchase and to course the same to the
plaint off as Realtor") inserted after the phrase "should he fail thereof" which follows the
statement of appellee's obligation. But following the rule that ambiguities or obscure clauses in
contracts cannot favor the one who has caused them (article 1377, new Civil Code), and it
appearing that the compromise agreement was drawn by appellant through his counsel, with the
paragraph in dispute creating an obligation in his favor, the ambiguity found therein must be
construed in favor of herein appellee. Appealed is affirmed, with costs against appellant.

Article 1378

G.R. No. L-47986 July 16, 1984

AQUILINA P. MARIN and ANTONIO S. MARIN, SR., petitioners, vs. JUDGE MIDPANTAO L.
ADIL, Branch 11, CFI, Iloilo; PROVINCIAL SHERIFF, CFI, South Cotabato; REGISTER OF
DEEDS, General Santos City; MANUEL, P. ARMADA and ARISTON P. ARMADA, now
substituted by his heirs, respondents.

G.R. No. L-49018 July 16, 1984

AQUILINA P. MARIN, petitioner, vs. JUDGE MIDPANTAO L. ADIL, CFI of Iloilo, MANUEL P.
ARMADA and ARISTON P. ARMADA, now substituted by his heirs, EVA SALAZAR VDA.
DE ARMADA, ARISTON, JR., DONALD and CRISTINA, all surnamed ARMADA, and Heirs
of MARGARITA M. ARMADA-HONORIO, respondents.

Facts:

Brothers Manuel & Ariston Armada and AquilineMarin are first cousins. The Armadas in 1963
expected toinherit some lots in General Santos City from their uncle,ProcesoPacificar, who died
in 1954. Marin, who residedin Cotabato, had hereditary rights in the estates of herparents, the
deceased spouses, Francisco and MonicaProvido, of Janiuay Iloilo, who died in 1938 and
1960,respectively. Manuel P. Armada resided in Janiuay.

In a document entitled “Deed of Exchange withQuitclaim,” Marin assigned to the Armada

brothers herhereditary share in the testate estate of her deceasedmother, Monica PacificarVda.
de Provido, in Iloilo, inexchange for the land of the Armadas located inCotabato. The exchange
would be rescindible when it isdefinitely ascertained that the parties have respectivelyno right to
the properties sought to be exchanged. Theexchange did not mean that the parties were
definitelyentitled to the properties being exchanged but it wasexecuted "in anticipation of a
declaration of said right".
When the deed of exchange was executed, the estate ofProcesoPacificar, in which the
Armadas expected toinherit a part, had been adjudicated to Soledad PronidoElevencionado a
sister of Mrs. Marin and a first cousinalso of the Armadas. Soledad claimed to be the sole heirof
Proceso. So, the Armadas and the other heirs had tosue Soledad.

The protracted litigation ended in a compromise in 1976when the Armadas were awarded Lots
906-A-2 and 906-A-3, located in Barrio lagao, General Santos City; Marinnever possessed
these two lots. They ere supposed to beexchange for her pro indiviso share in her parents'
estatein Janiuay.

Five years after the deed was executed, Marin agreed toconvey to her sister, Aurora Provido-
Collado, her interestin 2 lots in January in payment of her obligationamounting to P1,700. Then,
in the extra-judicial partitionof her parents' estate, Marin’s share was formallyadjudicated to
Aurora. It was stated therein that Marin"has waived, renounced and quitclaimed her share"
infavor of Aurora. As already stated, that share wassupposed to be exchanged for the two lots
in GeneralSantos City which the Armadas received in 1976 after apestiferous litigation. Hence,
the Armadas filed theinstant rescissory action against Mrs. Marin.

Issue:

Whether or not the deed of exchange and was valid andbinding?

Held:

NO. It is evident from the deed of exchange thatthe intention of the parties relative to the lots,
which arethe objects of the exchange, cannot be definitelyascertained. We hold that this
circumstance renders theexchange void or inexistent (Art. 1378, 2nd par. and Art.1409[6], Civil
Code).

It is provided in paragraph 7 that the deed should not beconstrued as an acknowledgment by

the Armadas andMrs. Marin that they are entitled to the propertiesinvolved therein and that it
was executed "in anticipationof a declaration of" their rights to the properties. Then, itis
stipulated in paragraph 8 that the parties should takepossession and make use of the properties
involved inthe deed. The two provisions are irreconcilable becauseparagraph contemplates that
the properties are still to beawarded or adjudicated to the parties whereas paragraph8
envisages a situation where the parties have alreadycontrol and possession thereof.

It should be noted that in Marin's answer with affirmativedefense she avers therein that her
1968 agreement withher sister means that she would convey her properties toAurora when the
Armadasshould be "adjudged to be without rights or interests toany properties in General
Santos City." Such aqualifications is not found in her agreement with hersister.

The instant rescissory action may be treated as anaction to declare void the deed of exchange.
Theaction to declare the inexistence of a contract doesnot prescribe (Art. 1410, Civil Code).
The properties covered by the deed should have beenspecified and described. A perusal of the
deed gives theimpression that it involves many properties. In reality, itrefers only to 8,124
square meters ofland, which the Armadas would inherit from their uncle inGeneral Santos City,
and to the 9,000 square metersrepresenting the proindiviso share of Mrs. Marin in herparents'
estate. As we have seen, Mrs. Marin renderedimpossible the performance of her obligation
under thedeed. Because of that impossibility, the Armadas couldrescind extrajudicially the deed
of exchange (Art. 1191Civil Code). If Mrs. Marin should sue the Armadas, heraction would be
barred under the rule of exceptio nonadimpleticontractus (plaintiff is not entitled to suebecause
he has not performed his part of the agreement).

Chapter 6: Rescissible Contracts

Article 1381

G.R. No. 139523 May 26, 2005

SPS. FELIPE AND LETICIA CANNU, petitioners, vs. SPS. GIL AND FERNANDINA GALANG
AND NATIONAL HOME MORTGAGE FINANCE CORPORATION, respondents.

Facts:

Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings &
Loan Association for P173,800.00 to purchase a house and lot located at PulangLupa, Las
Piñas, covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-
spouses. To secure payment, a real estate mortgage was constituted on the said house and lot
in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage
loan of respondents-spouses from Fortune Savings & Loan Association for P173,800.00.

Respondent Fernandina Galang authorized her attorney-in-fact, Adelina R. Timbang, to sell the
subject house and lot.

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance
of the mortgage obligations with the NHMFC and with CERF Realty. Of the P120,000.00,
petitioners paid P75,000.00 thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation was made and entered into by and
between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu
(vendees) over the house and lot in question.

Petitioners immediately took possession and occupied the house and lot. Petitioners paid
NHMFC a total of P 55,312.47. Petitioners paid the "equity" or second mortgage to CERF
Realty.
Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of
P45,000.00 or in the alternative to vacate the property in question, petitioners refused to do so.

In a letter petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice President, Fund
Management Group of the NHMFC that the ownership rights over the land covered by TCT No.
T-8505 in the names of respondents-spouses had been ceded and transferred to her and her
husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to
assume the mortgage and pay the remaining unpaid loan balance. Petitioners’ formal
assumption of mortgage was not approved by the NHMFC.

Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang
paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting
that the subject property had already been sold to them. Consequently, the NHMFC held in
abeyance the release of said TCT.

Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other
things, that petitioners (plaintiffs therein) be declared the owners of the property involved subject
to reimbursements of the amount made by respondents-spouses (defendants therein) in
preterminating the mortgage loan with NHMFC.

Respondent NHMFC claimed that petitioners have no cause of action against it because they
have not submitted the formal requirements to be considered assignees and successors-in-
interest of the property under litigation.

Respondents-spouses alleged that because of petitioners-spouses’ failure to fully pay the

consideration and to update the monthly amortizations with the NHMFC, they paid in full the
existing obligations with NHMFC as an initial step in the rescission and annulment of the Deed
of Sale with Assumption of Mortgage. In their counterclaim, they maintain that the acts of
petitioners in not fully complying with their obligations give rise to rescission of the Deed of Sale
with Assumption of Mortgage with the corresponding damages.

The lower court ruled in favor of defendants thus, ordering the Deed of Sale with Assumption of
Mortgage Obligation rescinded and declared nullified.

A Motion for Reconsideration was filed, but same was denied. Hence, this Petition for Certiorari.

Issue:

1. Whether or not there was substantial breach of the obligation that may lead to its rescission?

2. Whether or not the action for rescission is subsidiary?

Held:
The Supreme Court affirmed the decision of the appellate court thus ordered Spouses Gil and
Fernandina Galang to return the partial payments made by petitioners.

On the first issue, settled is the rule that rescission or, more accurately, resolution, of a party to
an obligation under Article 1191 is predicated on a breach of faith by the other party that violates
the reciprocity between them.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be
had only for such breaches that are substantial and fundamental as to defeat the object of the
parties in making the agreement. The question of whether a breach of contract is substantial
depends upon the attending circumstances and not merely on the percentage of the amount not
paid.

In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be
substantial. Taken together with the fact that the last payment made eighteen months before the
respondent Fernandina Galang paid the outstanding balance of the mortgage loan with
NHMFC, the intention of petitioners to renege on their obligation is utterly clear.

Petitioners had all the time to do what was required of them but still they failed to comply.

Despite demands for them to pay the balance, no payments were made. Their failure to fulfill
their obligation gave the respondents-spouses Galang the right to rescission.

On the second issue, the subsidiary character of the action for rescission applies to contracts
enumerated in Articles 1381 of the Civil Code. The contract involved in the case is not one of
those mentioned therein. The provision that applies in the case at bar is Article 1191.

From the foregoing, it is clear that rescission under Article 1191 is a principal action, while
rescission under Article 1383 is a subsidiary action. The former is based on breach by the other
party that violates the reciprocity between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed to
fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their
amortizations with the NHMFC.

Article 1383

G.R. No. 73893 June 30, 1987

MARGARITA SURIA AND GRACIA R. JOVEN, petitioners, vs. HON. INTERMEDIATE

APPELLATE COURT, HON. JOSE MAR GARCIA (Presiding Judge of the RTC of Laguna,
Branch XXIV, Biñan, Laguna), and SPOUSES HERMINIO A. CRISPIN and NATIVIDAD C.
CRISPIN, respondents.

FACTS
That on March 31, 1975, plaintiffs being the owners of a parcel of land situated at Barrio San
Antonio, San Pedro, Laguna, entered into a contract denominated as DEED OF SALE WITH
MORTGAGE, with herein defendants, a true copy of said contract.

That the defendants violated the terms and conditions of the contract by failing to pay the
stipulated installments and in fact only one installment due in July 1975 (paid very late in the
month of September, 1975) was made all the others remaining unsettled to the present time;

That repeated verbal and written demands were made by plaintiff upon the defendants for the
payment of the installments, some of said written demands having been made on September
24, 1981, February 7, 1982, February 24, 1983, March 13, 1983, and April 12, 1983, but
defendants for no justifiable reason fail. On November 14, 1983, petitioners filed their answer
with counterclaim.

On July 16, 1984, petitioners filed a motion to dismiss complaint, alleging that: That plaintiffs are
not entitled to the subsidiary remedy of rescission because of the presence of remedy of
foreclosure in the Deed of Sale with Mortgage, secondly that, assuming arguendo that
rescission were a proper remedy, it is apparent in the face of the Complaint that the plaintiffs
failed to comply with the requirements of law, hence the rescission was ineffective, illegal, null
and void, and invalid.

On July 26, 1984, private-respondents filed their opposition to the above motion. In the
meantime, on August 6, 1984, petitioners formerly offered to pay private-respondents all the
outstanding balance under the Deed of Sale with Mortgage, which offer was rejected by private
respondents on August 7, 1984. On November 26, 1984, the respondent-Court denied the
motion to dismiss.

Issue:

Whether or not the seller can resort to the remedy of rescission under Art 1191 which provides
that the subsidiary and equitable remedy of rescission in case of breach of reciprocal obligation.

Held:

The petition is hereby GRANTED. The Intermediate Appellate Court’s decision is REVERSED
and SET ASIDE. The petitioners are ordered to pay the balance of their indebtedness under the
Deed of Absolute Sale with Mortgage with legal interests from the second installment due on
October 24, 1975 until fully paid,

• There is no dispute that the parties entered into a contract of sale as distinguished from a
contract to sell. By the contract of sale, the vendor obligates himself to transfer the ownership
of and to deliver a determinate thing to the buyer, who in turn, is obligated to pay a price
certain in money or its equivalent (Art. 1458, Civil Code). From the respondents’ own
arguments, we note that they have fully complied with their part of the reciprocal obligation.
• The petitioners’ breach of obligations is not with respect to the perfected contract of sale but in
the obligations created by the mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one which by law is available only in
the absence of any other legal remedy. The relationship between the parties is no longer one
of buyer and seller because the contract of sale has been perfected and consummated. It is
already one of a mortgagor and a mortgagee. In consideration of the petitioners’ promise to
pay on installment basis the sum they owe the respondents, the latter have accepted the
mortgage as security for the obligation.
• The petitioners have offered to pay au past due accounts. Considering the lower purchasing
value of the peso in terms of prices of real estate today, the respondents are correct in stating
they have suffered losses. However, they are also to blame for trusting persons who could not
or would not comply with their obligations in time. They could have foreclosed on the
mortgage immediately when it fell due instead of waiting all these years while trying to enforce
the wrong remedy.