Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. 2684 March 15, 1907

THE FIDELITY AND DEPOSIT COMPANY OF MARYLAND, plaintiff-appellant,

vs.

WILLIAM A. WILSON, ET AL., defendants-appellees.

Hartigan, Marple, Rohde & Gutierrez for appellant.

F.G. Waite and H.D. Terrell for appellees.

MAPA, J.:

The defendant Wilson was, on the 1st of October, 1902, an employee of the Government of the
Philippine Islands, as disbursing officer of the Bureau of Coast Guard and Transportation. For the
security of the Government the plaintiff company and another company. The American Surety Company
of New York, became sureties on the official bond of Wilson for the sum of $ 15,000, United State
currency. Wilson defaulted in the sum of $ 8,931.80, United States currency, and the said two surety
companies, after demand duly made upon them by the Government, were compelled to pay and, as a
matter of fact, did pay to said Government, in accordance with said bond, the sum of $ 4,465.90, United
States currency, each.

Wilson, who had left the Philippine Islands, was captured in the city of Montreal, Canada, for the
purpose of being tried before the courts of the Philippine Islands for the defalcation of said sum. When
apprehended Wilson had on his person the sum of $ 785 in gold, consisting of the following:

1 bill of $5, No. 333,448, on the Bank of Montreal.

1 United States bill, silver certificate, $10, series of 1891.

3 United States $10 notes, series of 1882.

5 United States $10 notes, series of 1891.

24 United States $10 notes, series of 1880.

45 United States $10 notes, series of 1901.

This sum and amount was turned over to the custody of Mr. Branagan, the Insular Treasurer.

The facts of this case, among others, are the following: On October 17, 1904, the plaintiff filed a
complaint against Wilson and The American Surety Company asking, first, that judgment be rendered
against Wilson for the sum of $4,464.90, that amount having been paid by plaintiff to the Government
under plaintiff's surety bond; second, that there be applied to the payment of said judgment the said
sum of $785 found in possession of Wilson and that said plaintiff be preferred in its right to the said
money and to receive the same; and third, that a depositary be named by the court for the purpose of
caring for and administering said amount during the pendency of the case.

On the same date, October 17, a depositary was named, such depositary taking in charge the said $785
on that date, the said sum of money being at this time in the possession of said depositary.

On October 26, 1904, H.D. Terrell filed a complaint as intervenor in the case, alleging that on September
3, of the same year, the defendant Wilson had ceded and transferred to the said Terrell all of his, the
said Wilson's rights in and to the said $785 in payment on account of a larger sum then owed by said
Wilson to the said H.D. Terrell for professional services already rendered and to be rendered as attorney
for said Wilson, under agreement with the same; that Treasurer Branagan was duly notified on the 17th
day of October, 1904, of this transfer, at which time the Treasurer had said sum in his care, and this
before the notifications of the appointment of said depositary in the principal case. Basing his claim on
these facts, Terrell claims the right of ownership in and to the said sum and asks that the same be
delivered to him as the legitimate owner to the exclusion of the other parties in the case.

In this case of intervention The Fidelity and Deposit Company of Maryland, the plaintiff in the principal
cause, and The American Surety Company of New York together in cooperation and against the claim of
the intervenor Terrell, both of them, alleging on their part, better right that the intervenor to receive the
sum in question, asked that the said sum be delivered to them in equal shares and portions as part
payment and on account of the amounts which they had paid respectively to the Government as
sureties on the bond of Wilson. In this way the first pretension or claim of preference as alleged by The
Fidelity and Deposit Company in its complaint was modified with respect to and as against The American
Surety Company of New York. It is asserted by these companies, as a basis of their right and claim, that
the funds in question are a portion of the money taken from the Government by Wilson and therefore
the property of the said Government and that they became subrogated to rights of the Government in
and to the said sum by reason of the payment by them as sureties on the bond of Wilson.

Judgment was rendered against Wilson by default, the latter not having answered to the complaint of
Terrell were true, in this way coming into the case in cooperation with said Terrell in his pretension.

After due trial of the cause a judgment was rendered by the court declaring proven, among others, the
facts as stated in the first part of his decision and found as a conclusion of law that the said intervenor
Terrell "became the owner and with the right to the possession of said funds before the commencement
of this action and still has the right to the possession of the same."

In accordance with this conclusion and the facts as set out in the judgment, the following order was
made by the court: "Let judgment be entered in favor of the party plaintiff, The Fidelity and Deposit
Company of Maryland, and against the defendant Wilson, for the sum of $4,465.90, United States
currency, the equivalent of P8,931.80, Philippine currency, together with interest on the same at the
rate of 6 per cent per annum from the 22nd day of October, 1903, and for the costs of this action, and in
favor of the intervenor H.D. Terrell and against all the other parties of this action, plaintiff and
defendant, for the possession of the funds now in the hands of the depositary appointed by this
court, ... amounting in value to the sum of $785, United States currency, and in the event that the
identical money can not be delivered, then its equivalent of the total of the same — that is to say, 1,570
pesos, Philippine currency — without cost. . . ."

The plaintiff only in the principal suit — that is to say, The Fidelity and Deposit Company — filed its
exception to the judgment. The American Surety Company of New York failing to appeal, the judgment
with respect to that company became final, hence this court can not decide with regard to that. The
same should be said with regard to that part of the judgment against Wilson for the payment to The
Fidelity and Deposit Company of the sum $4,465.90, no appeal from said judgment having been made
by Wilson.

There was no new trial asked for and the parties in this instance expressly admit, as proven, the facts as
set out in the decision rendered.

The only assignment of error alleged by the appellant in its brief, is in the following terms: "The court
erred" its says, "in rendering judgment in favor of the intervenor H.D. Terrell for the $785 in the hands
of the depositary." Therefore, that part of the judgment of the lower court that refers to this point is the
only thing, in fact, submitted to us for review.

According to our point of view, the only question here is to deduce and determine the true legal effects
of the transfer made by Wilson in favor of Terrell.

This transfer is made literally in the following terms:

MANILA, P.I., September 3, 1904.

To whom it concerns:

For value received, I hereby transfer and cede to Judge H. D. Terrell all my rights, title, and interest in
the following-described property belonging to me and now in the hands of Frank A. Branagan, Treasurer
of the Philippine Archipelago, under the attachment of the court of Manila. (Here appears the
description of the bank bills transferred, hereinabove described.)
(Signed) W.A. WILSON.

As is seen, this transfer was made before the filing of the complaint of the appellant, and in addition
thereto, it is said that the Insular Treasurer, Mr. Branagan, was also notified before the filing of said
complaint. The last does not appear to be clear in the record for the reason that the said notification
served on Branagan was so served on October 17, 1904, precisely the same date upon which the
complaint was filed and appointment of the depositary was made by the court in virtue of the same, and
upon which said date the depositary took possession of the said funds, the subject matter of this suit.
There is no data at hand to show in a precise manner which of the said acts took place before the other.
It is true that the judgment of the lower court states that Terrell became the owner of the funds before
the commencement of the action, but we consider this rather as a conclusion of law than of fact; that is
to say, that fact that the notification of the said transfer had been served on Treasurer Branagan before
the filing of the complaint. However, it may be, this may be admitted as true and so taken into
consideration in this decision.

Terrell claims, and the court below so holds in its judgment, that in virtue of said transfer the ownership
of Wilson in and to the funds was transferred to Terrell in fact and in law. If this had been the case, the
judgment would have been just and legal and would, therefore, be affirmed herein.

But our opinion is contrary to that sustained by the trial court in regard to this point. We are of the
opinion that the transfer by itself, and afterwards the notification of the same of Treasurer Branagan,
did not produce nor could it produce the effect of transfer to Terrell of the ownership of the funds so
transferred and which were then in the possession of the said Treasurer. To have this effect, it would
have been necessary that the delivery of the funds had been made directly Terrell, which fact has not
been proved at any time. There is no question as to this last point. The funds were in the possession of
Branagan and afterwards were transferred to the possession of the depositary appointed, by the court
where such funds now are, and this without their ever having been taken possession of the intervenor
Terrell. It is not alleged, nor it is claimed by Terrell, that the delivery of the funds was ever made in any
manner recognized by the law. He claims the right of ownership from the mere fact of having derived
the same, not from the fact of any delivery, but from the very fact of the transfer and of his subsequent
notification to Treasurer Branagan, it being, in addition, very clear that such notification does not
constitute, in any manner, the fact of delivery as established by articles 1462, 1463, and 1464 of the Civil
Code, all of which cover, in full this subject-matter.

Therefore, in our Civil Code it is a fundamental principle in all matters of contracts and a well-known
doctrine of law that "non mudis pactis, sed traditione dominia rerum transferuntur." In conformity with
said doctrine as established in paragraph 2 of article 609 of said code, that "the ownership and other
property rights are acquired and transmitted by law, by gift, by testate or intestate succession, and, in
consequence of certain contracts, by tradition." And as the logical application of this disposition article
1095 prescribes the following: "A creditor has the rights to the fruits of a thing from the time the
obligation to deliver it arises. However, he shall not acquire a real right." (and the ownership is surely
such) "until the property has been delivered to him."
In accordance with such disposition and provisions the delivery of a thing constitutes a necessary and
indispensable requisite for the purpose of acquiring the ownership of the same by virtue for a contract.
As Manresa states in his Commentaries on the Civil Code, volume 10, pages 339 and 340: "Our law does
not admit the doctrine of the transfer of property by mere consent but limits the effect of the
agreement to the due execution of the contract. ... The ownership, the property right, is only deprived
from the delivery of a thing . . . ."

Applying this doctrine concretely to the contract of transfer set up by Terrell as the basis of his
complaint in intervention, the author says, at page 341 of the volume and work above cited: "The
transfer of the ownership in the contract of such transfer, does not produce the effect by the fact of the
mere consent, but is acquired by tradition and in the due observance of general precepts." Therefore, by
reason of the non-delivery Terrell did not acquire the ownership of the property transferred to him by
Wilson. It is only the jus ad rem, and not the jus in re, that was acquired by Terrell by virtue of the
transfer, made by the consent of the transferor and the transferee but not consummated by the delivery
which never came to pass and which delivery was the object of such transfer.

But if Terrell could not be considered as the owner of said funds in question, it is undeniable that he had
rights with regard to the same as a creditor by virtue of that transfer. The same right, that of a creditor,
and no other is the right of the appellant in that it has not been contradicted that the rights of the
Government, in its judicial relation to Wilson, had not been subrogated to the appellant. The allegation
of the appellant that the bank bills taken from the person of Wilson are the property of the
Government, in order to be taken into consideration, is to conclude that they belong to the appellant as
owner of the same by reason of said subrogation of right, as aforesaid. This has no fundamental basis for
the reason that such bank bills have never been duly identified. Without any proof of identification it is
not possible to know if said bank bills are really a part of the funds of the Government appropriated by
Wilson. The Government under such circumstances could not allege specifically the right of ownership
of said bank bills.

Now, the creditors, the appellant and the appellee are both claiming at the same time the delivery of
the funds in question for the payment of their respective credits and it becomes a question of
preference of creditors, since the sum, the object of the suit, is not sufficient to satisfy the claims of both
parties.

According to our view, neither of the two creditors should enjoy preference with regard to the other.
Preference is determined by the nature of the credit in some cases and by the priority of date in others.
The first, when it deals with privileged credits, which different kinds of privileged credits are enumerated
in articles 1922, 1923, and 1924 of the Civil Code; and the second, when such credits are without special
privilege, but are set forth in a public document or a final judgment. (Par. 3, article 1924.) In neither of
these two classes do we find the credit of the appellant or that of the appellee. The credit of the
appellee is only shown in a private document, and the right, or credit, of the appellant is that derived by
reason of the payment made by appellant to the Government as a surety on the bond of Wilson, and
nothing more than this appears in the allegations and admissions of the parties during the trial of the
case. It does not appear by the bill of exceptions in this case that any document was ever presented in
justification of such payment. Neither does the decision refer to any document as showing, as proven,
said payment. These two credits not coming under any of the articles herein cited, the same pertain to a
general class, and therefore do not enjoy any preference, in accordance with provisions of article 1925
of the Civil Code. This being so, the two creditors should be paid of pro rata from the funds in question
and without consideration of the dates. (Rule 3, of article 1929.)

The judgment appealed from is, therefore, reversed with respect to the order of the trial court ordering
the delivery of said funds, in their total amount, to the intervenor, H.D. Terrell, and in place of said order
of said trial court we order that the payment and delivery of said funds be made to said Terrell and to
the appellant, The Fidelity and Deposit Company of Maryland, pro rata, with respect to their respective
credits, without special provision as to days from the notification hereof let judgment be entered in
accordance herewith, and ten days thereafter let the case be remanded to the court from whence it
came for proper action. So ordered.

Arellano, C.J., Torres, and Tracey, JJ., concur.

Johnson and Willard, JJ., dissent.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-10244 February 29, 1916

SANTIAGO CRUZADO, plaintiff-appellant,

vs.

ESTEFANIA BUSTOS and MANUEL ESCALER, defendants-appellees.

Felix Ferrer for appellant.

Augusto Gonzalez for appellees.

TORRES, J.:

This appeal, by bill of exceptions, was taken from the judgment of June 17, 1914, in which the trial judge
absolved defendants from the complaint and plaintiff from the cross-complaint, without express finding
as to costs. Counsel for plaintiff appealed from this judgment and moved for a new trial. This motion
was denied, exception was taken by appellant, and, on the filing of the proper bill of exceptions, the
same was approved, certified, and transmitted to the clerk of this court, together with a transcript of the
evidence introduced at the trial.

Counsel for the plaintiff Santiago Cruzado filed a written complaint on October 8, 1910, amended on
September 25, 1913, in which he alleged that plaintiff was the owner of certain rural property situated
in the barrio of Dolores, formerly San Isidro, of the municipality of Bacolor, Pampanga, containing an
area of 65 balitas and bounded as set forth in the complaint; that Estafania Bustos, during her lifetime,
and now the administrator of her estate, together with the other defendant, Manuel Escaler, had, since
the year 1906 up to the present, been detaining the said parcel of land, and had refused to deliver the
possession thereof to plaintiff and to recognize his ownership of the same, notwithstanding the
repeated demands made upon them; that by such detention, the plaintiff had suffered losses and
damages to the amount of P3,500. He therefore asked for judgment declaring plaintiff to be the owner
of the said parcel of land and ordering defendants to return it to plaintiff and to pay the latter P3,500 for
losses and damages, and the costs.

The demurrer filed by the defendant Bustos having been overruled, in her answer she made a general
denial of each and all of the allegations of the complaint, and of each and all of the paragraphs thereof,
and, as a special defense, alleged that the title to the said land, produced by the plaintiff, was not a
lawful one, for the reason that only a simulated sale of the land was made by the between herself and
the deceased Agapito Geronimo Cruzado, plaintiff's father, and that for more than thirty years preceding
the present time she had been the sole, exclusive, and lawful owner of the said parcel of land in
question; that she had been holding it quietly, peaceably, publicly and in good faith; that it formed an
integral part of another larger parcel of land, both parcels aggregating a total area of 100 balitas, 9
loanes, and 41 square brazas; that in September, 1891, with plaintiff's knowledge, the defendant Bustos
sold and conveyed all the said property to the other defendant Manuel Escaler who then acquired the
possession and ownership of the said parcel of land, and had retained such ownership and possession
up to the present time; that at no time and on no account whatever had plaintiff or any other person
except defendants acquired possession of the said parcel of land or any part thereof, nor any right or
title therein. She therefore prayed to be absolved from the complaint, with the costs against plaintiff.

The other defendant, Manuel Escaler, in an amended answer to the aforementioned complaint, denied
each and all of the allegations therein contained and each and all of its clauses, and, as a special
defense, alleged that plaintiff's title to the said land was illegal as only a simulated sale was made by and
between Agapito Geronimo Cruzado, plaintiff's predecessor in interest, and Bernardino Dizon; that
defendants had been in possession of the said parcel of land for more than thirty years; that the
defendant Escaler in good faith purchased the land in question from Estefania Bustos, widow of Dizon,
without ever having had any notice of any defect in the vendor's title; that plaintiff had knowledge of
the contract of sale of the land in question yet did nothing to oppose its purchase by the defendant
Escaler, wherefore the latter, in acquiring the property, did so under the belief that the plaintiff Santiago
Cruzado had no right or interest therein. He therefore prayed that the complaint be dismissed, with the
costs against plaintiff, and that an injunction issue to restrain the latter from interfering with the
defendant Escaler in the enjoyment of his property and rights and from performing any act prejudicial to
his interests.

On the case coming to trial, both parties adduced evidence, among which was included the deposition
of Inocencio Rosete.

Counsel for defendants, in a cross-complaint set forth: that as shown by the evidence, the defendant
Escaler acquired in good faith from Estefania Bustos the land in question at a time when there was no
record whatever in the property registry to show that this land belonged to a third person or any other
than the vendor; that, on entering into possession of the property, Escaler spent P4,000 in-
improvements and in the repair of a long dike to prevent the erosion of the land by the frequent
overflows of the adjoining estuary; that of this sum P2,000 was paid by Escaler and the remaining P2,000
by Estafania Bustos, in her capacity as lessee of the land; and that in case the judgment of the court
should be adverse to defendants, these latter, as owners in good faith, were entitled to be indemnified
by plaintiff for the said expenses. He therefore asked that plaintiff be ordered to reimburse half of the
said P4,000 to each of the defendants in case judgment should be rendered favorable to plaintiff.

The latter's counsel, in answer to the said cross-complaint, specifically denied each and all of the
allegations thereof and, in special defense, reproduced plaintiff's amended complaint in all its parts and
alleged that the facts set forth in the cross-complaint did not constitute a cause of action. He therefore
prayed that plaintiff be absolved from the cross-complaint and that judgment be rendered against
defendants, in conformity with the prayer of his complaint.

After the evidence was all in, counsel for the defendant Escaler moved that the deposition of the
witness Inocencio Espanol Rosete be admitted into the record, and in support of his motion stated that
with the authorization of the court the said deposition had been taken on November 21, 1913, in the
municipality of Arayat in the presence of plaintiff's attorney; that the said declaration of the deponent
was duly forwarded to the clerk of the court, and there attached to the record, but through an
unintentional oversight of defendant's attorney, it was not presented in evidence at the trial; that this
deposition was very important for the defendants' defense; and that the deponent was and continued
to be unable to appear before the court on account of a threatened attack of brain fever which might
develop during the journey from Arayat to San Fernando.

Plaintiff's counsel asked that the foregoing motion be overruled and that the deposition of the witness
Rosete be stricken from the record, because defendants' motion was made out of time and was contrary
to the rules of procedure, and there was no reason for altering the order of procedure, as requested by
defendants, for, when the period for the reception of the evidence of both parties is closed, an
alteration in the order of procedure such as asked by defendants would be improper and illegal, counsel
citing the decision of this court in the case of Garcia vs. Reyes.1 He alleged, moreover, that the said
deposition necessarily affected the main issue in controversy and that to allow the motion would be in
contravention of the provisions of section 364 of the Code of Civil Procedure. He therefore asked that
the said motion be overruled. The court, however, ordered that the deposition of the witness Inocencio
Rosete be admitted in evidence, and that plaintiff's exception be noted. In view of the foregoing, the
judgment aforementioned was rendered.

The questions herein submitted for the decision of this court are:

1. Is it or is it not true that the deed of sale, Exhibit A, (p. 40 of the record) of 65 balitas of land situated
in the municipality of Bacolor, Pampanga, executed by Estefania Bustos, with the assistance of her
husband Bernardino Dizon, in favor of Agapito Geronimo Cruzado, for the sum of P2,200, was simulated,
not with intent to defraud any third person, but for the sole purpose of making it appear that the
vendee, Cruzado, then a candidate for the position of procurador on the date of the said deed,
September 7,1875, possessed real estate to the value of P2,200 with which to guarantee the faithful
discharge of the duties of the office of procurador?

2. It is or is it not true that, notwithstanding such apparent alienation of the 65 balitas of land, the
supposed vendee continued in possession thereof, without the supposed purchaser having taken
possession of the property until September 10, 1891, when its owner Bustos sold to Escaler, not only the
said 65 balitas of land, but also all the remainder of a large tract of agricultural land of which the portion
appearing as sold to Agapito G. Cruzado formed and forms a part, and that Escaler was then and, until
the date of plaintiff's claim, continued to be in peaceable, uninterrupted possession of the said whole
tract of land, including the aforementioned portion of 65 balitas?

3. Has the right of ownership prescribed which Manuel Escaler is and has been enjoying in the land
which Estefania Bustos had sold to him and which includes the parcel of 65 balitas claimed by plaintiff,
Santiago Cruzado, or has the right of any real or personal action he might exercise by reason of the sale
to Cruzado prescribed on account of the lapse of the respective periods fixed by law, between the 7th of
September, 1875, the date of said sale, and the 8th of October, 1910, that of the filing of the complaint?

To judge from the evidence adduced in this case, there is ample ground for holding that the said deed of
sale of a parcel of 65 balitas of land was simulated, not to defraud any creditor or other person
interested in the land nor for the purpose of eluding any lawful obligation on the part of its owner,
Estafania Bustos, but for the sole purpose of doing a favor, of rendering a special service to Agapito
Geronimo Cruzado, father of the plaintiff Santiago Cruzado.

During his lifetime Agapito G. Cruzado aspired to hold the office of procurador in the Court of First
Instance of Pampanga, but notwithstanding that he possessed the required ability for the discharge of
the duties of that position, he was unable to give the required bond, an indispensable condition for his
appointment, as he was possessed of no means or real property wherewith to guarantee the proper
discharge of his duties in the manner prescribed by the laws then in force.

In the certified copy of the record of the case tried in the Secretaria de Gobierno of the abolished Real
Audiencia de Manila, issued by the Assistant Executive Secretary and chief of the division of archives,
there appears on page 178 a decree by the presidencia of this latter tribunal, issued by virtue of the
resolution passed by the sala de gobierno on November 24, 1875, whereby it was ordered that Agapito
Geronimo Cruzado should be noticed that within the period of 30 days he must show proof of having
furnished a bond of P700 in cash or of P2,100 in real property as security for the position of procurador
to which he had been appointed, with the understanding that should be fail to furnish such bond he
would not be issued the certificate entitling him to practice the profession of procurador.

After complying with the requirements of the said court and executing the mortgage deed of the land
purchased by the procurador elect Cruzado from Estefania Bustos, on March 18, 1876, the mortgage
was recorded in the old mortgage registry then kept in the office of the Ayuntamiento of Manila during
the former sovereignty, and thereafter Agapito G. Cruzado received his appointment and commenced to
discharge the duties of his position.

The above-related facts conclusively prove that Estefania Bustos executed the deed of sale Exhibit A in
favor of the deceased Cruzado in order to enable the latter, by showing that he was a property owner,
to hold the office of procurador. This position he held for many years, thanks to the liberality of the
pretended vendor, who, notwithstanding the statements contained in the deed of sale, does not appear
to have been paid anything as a result of the sham sale, a sale which was affected, not in prejudice or
fraud of any person, nor those who were entitled to hold Cruzado liable for the proper discharge of the
duties of his office, because, had the need arisen, any liability of his could have been covered by the
value of the land, the sale of which was fictitiously set forth in that deed as lawfully belonging to
Cruzado, and then Estefania Bustos would have had no right either to object to or escape the
consequences of that alienation, although simulated.

The simulation of the said sale was effected by making a pretended contract which bore the appearance
of truth, when really and truly there was no contract, because the contracting parties did not in fact
intend to execute one, but only to formulate a sale in such a manner that, for the particular purposes
sought by Bustos and Cruzado, it would appear to have been celebrated solely that Cruzado might hold
his office of procurador on the strength of the security afforded by the value of the land feignedly sold.

The record does not show when the procurador Cruzado died, but it is unquestionable that he was still
living during the last months of 1882, judging from the certificate which he himself issued to Norberto
Decena (Exhibit 3). He must have died sometime between the years 1882 and 1890, to judge from the
contents of the letters plaintiff addressed to Natalio Dizon, one of the children of Estefania Bustos, on
July 7, 1891, and July 4, 1896, and from the fact that in the said year 1890 Agapito G. Cruzado was no
longer a practicing procurador in the Court of First Instance of Pampanga..

It is true that even after the death of the aforesaid procurador, any liability he might have incurred in
connection with the exercise of his office could have been, upon presentation of the proper claim,
collected out of the value of the land apparently sold by Estafania Bustos and pledged as security for the
proper discharge of the duties of his office. On October 8, 1910, when his son Santiago Cruzado filed his
complaint, already more than twenty years had elapsed since 1889, if plaintiff's father died in 1889 and
not between 1883 and 1889; therefore, any right of action to foreclose the mortgage, or any personal
action with regard to the value of the encumbered land, as the result of any liability incurred in the
performance of his duties as procurador, has more than prescribed. (Art. 1964, Civil Code, and secs. 38,
39 and 43, Act. No. 190.).
On the termination of the sovereignty of Spain over this Archipelago, the Spanish courts here
established went out of existence on January 31, 1899, the Pampanga court indeed being abolished
about the middle of 1897 as a result of the revolution against the former sovereignty. The personnel of
those courts also ceased to render service as such. It may therefore be affirmed that, if the said lien on
the land in question has not terminated by its no longer having any object, it is at least undeniable that
prescription has already run with respect to any action that might have been brought against the
pledged land to recover for any liability which might have been incurred by the procurador Cruzado
during his lifetime in connection with his office, so that this real estate may now be considered as free
from that hypothecary encumbrance.

At the present time we have only to explain what rights Agapito G. Cruzado transmitted at his death to
his son, the herein plaintiff, by virtue of the deed of sale of the land in litigation, executed by its owner
Estefania Bustos.

It is unquestionable that the contract of sale of the 65 balitas of land was perfect and binding upon both
contracting parties, since they both appear in that instrument to have agreed upon the thing sold, to
wit, the 65 balitas of land, and upon the price, P2,200; but it is also undeniable that the said contract
was not consummated, inasmuch as, notwithstanding that the deed of sale Exhibit A was accomplished
and this document was kept by the pretended purchaser, it is positively certain that the latter did not
pay the purchase price of P2,200, and never took possession of the land apparently sold in the said
deed. All that this vendee afterwards did was to pledge the land — on March 14, 1876, that is, six
months and some days after the 7th of September, 1875, the date when he purchased it — as security
for the faithful discharge of the duties of his office of procurador of the Court of First Instance of
Pampanga.

The plaintiff, Santiago Cruzado, a son of the vendee, claiming that the said land was being detained by
the vendor, or by the administrator of the latter's estate or her death after the commencement of these
proceedings, and by the other defendant Manuel Escaler, prayed the court to declare him to be the
owner thereof, to order the defendants to return it to him and to pay him for losses and damages, and
the costs.

The action brought by the plaintiff is evidently one for recovery of possession, founded on the right
transmitted to him by his father at his death, — a right arising from the said simulated deed of sale of
the land in question. This action is of course improper, not only because the sale was simulated, but also
because it was not consummated. The price of the land was not paid nor did the vendee take possession
of the property from the 7th of September, 1875, when the said sale was feigned, until the time of his
death; nor did any of his successors, nor the plaintiff himself until the date of his claim, enter into
possession of the land.

It is indeed true that it is not necessary that the thing sold or its price should have been delivered in
order that the contract of purchase and sale be deemed perfect on account of its being consensual, and
from it reciprocal obligations arise mutually to compel the parties to effect its fulfillment; but there is no
transmission of ownership until the thing, as in the case at bar, the land, has been delivered, and the
moment such delivery is made the contract of purchase and sale is regarded as consummated. Article
1450 of the Civil Code, relied upon in this connection by the appellant, refers solely to the perfection of
the contract and not to its consummation.

The purchaser is also a creditor with respect to the products of the thing sold, and article 1095 of the
Civil Code prescribes as follows:

A creditor has a right to the fruits of a thing from the time the obligation to deliver it arises. However, he
shall not acquire a property right thereto until it has been delivered to him.

The provisions of this article are in agreement with that of the second paragraph of article 609 of the
same Code, which is of the following tenor:

Ownership is acquired by retention.

Ownership and other property rights are required and transmitted by law, by gift, by testate or intestate
succession, and, in consequence of certain contracts, by tradition.

They can also be acquired by prescription.

The provisions of the said article 1095 are also in accord with those of article 1462 which reads:

A thing sold shall be considered as delivered, when it is placed in the hands and possession of the
vendee.

When the sale should be made by means of a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if in said instrument the
contrary does not appear or may be clearly inferred.

It is true that the deed of sale Exhibit A remained in possession of the vendee Cruzado, but the sale is
not to be considered as consummated by this because the said vendee never entered into possession of
the land and neither did his son the plaintiff. The latter, moreover, was unable to prove that at any time
as owner of the land he collected the fruits harvested thereon, or that any other person cultivated the
said land in the name and representation of his deceased father or of the plaintiff himself. The fiction
created by means of the execution and delivery of a public instrument produces no effect if the person
acquiring it never takes possession of the thing sold or acquired, as happened in the case at bar.

If, as prescribed by the preinserted article 1095, the creditor, and in the present case the vendee, does
not acquire a property right in the land purchased until the property has been delivered to him or he has
taken possession of it, it is unquestionable that, as neither the plaintiff nor his predecessor in interest
took possession of the land in litigation, neither of them acquired any property right therein and,
consequently, could not and cannot now bring an action for recovery of possession which arises out of a
property right in a thing which belongs to them and not a mere right productive of a personal obligation.
The plaintiff Santiago Cruzado could only, in a proper case, exercise the personal right of action flowing
from the right possessed by his father to compel the vendor to fulfill the contract made in a public
instrument to deliver the land sold or to give him possession of it, in consequence of the said contract,
though simulated and executed for the sole purpose that the deceased Cruzado in default of P700 in
cash might appear to own real estate with which to insure the proper performance of his duties as
procurador, an office he then desired to hold.

The supreme court of Spain in a decision of cassation of June 1, 1990, established the following doctrine:

That articles 1258 and 1450 of the Civil Code and the decisions of cassation of June 30, 1854, April 13
and December 13, 1861, June 30, 1864, and April 19 and December 15, 1865, do not warrant the
conclusion that whoever purchases personal or real property may exercise with respect thereto all rights
of action inherent in its ownership, without it having, in some way or another, been placed at his
disposal. On the contrary, the distinction between the perfecting and the consummation of a contract
marks the diversity of relations of the contracting parties among themselves and of the owner with
respect to what constitutes this property.

This principle is in harmony with those set up by the same high tribunal in its decision of January 19,
1898, and March 8, 1901.

In this last decision, also rendered on an appeal in cassation, the doctrine enunciated in the excerpt
copied here below was established:

That the contract of purchase and sale, as consensual, is perfected by consent as to the price and the
thing and is consummated by the reciprocal delivery of the one and the other, the full ownership of the
thing sold being conveyed to the vendee, from which moment the rights of action derived from this right
may be exercised.

It is, then, of the utmost importance to examine whether in the said sale the purchase price was paid
and whether the vendee took possession of the land supposed to have been sold.

The record discloses that Cruzado during his lifetime was, before he became a procurador, an official
escribiente or clerk charged with the duty of coursing records and proceedings in the Court of
Pampanga; that his salary was hardly sufficient to maintain him and his family; that on account of the
insufficiency of his monthly stipend, he was frequently obliged to borrow money from his friends,
notwithstanding that he with his family lodged in the house of Bernardino Dizon, the husband of the
vendor Bustos, situated in the municipality of Bacolor, with whom Cruzado maintained intimate
relations of friendship, and on this account the said couple were content to live in a country house they
owned on one of their rice fields. Such was the testimony of several witnesses who lived in that
municipality, and who knew and had considerable dealings with the plaintiff's father for many years. It
was the opinion of these witnesses that the deceased Agapito G. Cruzado was a poor man, for the
reason that his monthly salary scarcely provided for the needs of himself and his family, and they
therefore believed that he could not have furnished the sum of P2,200 to purchase the land in question,
and, furthermore, if the plaintiff's father had possessed this sum, he would have made the deposit of
the sum of P700, the amount of security required by the Presidencia of the former Real Audiencia de
Manila for his appointment as procurador, since, having the means, he would have preferred to deposit
this smaller sum rather than to have used P2,200 in acquiring a piece of land from which he would
derive no benefit whatever, as in fact he never did, as he must have known that in spite of the simulated
sale of the property its owner would continue in its possession and would cultivate it, as she did do until
her death. It is, therefore, unquestionable that the price of the sale was not paid, an omission which
would indicate that it was in effect simulated.

Aside from the fact that the spouses Estafania Bustos and Bernardino Dizon had no need to sell the said
65 balitas of land, or of fencing or separating this parcel from the large tract of land that belonged to
them and of which it formed a part, for the reason that they were rich and at that time were not in need
of money to cultivate their extensive landholdings, it is also to be noted that the portion of land sold was
worth very much more than the P2,200 which, in the said instrument, purported to be its price.

In addition to the foregoing, the proceedings in the case at bar furnish ample proof that Agapito
Geronimo Cruzado during his lifetime stated to various persons that he succeeded in giving bond for his
appointment as procurador by means of the said instrument of simulated sale, executed in his favor by
the spouses Dizon and Bustos, as he did not have the money to make the deposit required for his
appointment. So close were the relations that then existed between the Cruzado family and that of
Dizon and Bustos, that later on the plaintiff married a daughter of these latter; hence, plaintiff, in the
beginning of his letters Exhibits 8 and 9 addressed to Natalio Dizon, a son of the vendor Estefania Bustos,
calls his correspondent his "dear and esteemed brother-in-law." It is therefore not stranger that these
spouses should have wished to help plaintiff's predecessor in interest by assisting him to obtain the
office of procurador, even to the extent of making a feigned sale.

However, years afterwards, prompted by an intuition of possible future difficulties, Dizon and his wife
Bustos went to the office of Agapito G. Cruzado and required him to cancel the said deed of sale, in
order to avoid any lawsuit after their death. Cruzado promised to look for money wherewith to
substitute the mortgage bond. This demand had to be repeated several times, because Cruzado did not
cancel the deed as he promised.

Furthermore, it is shown that the instrument Exhibit A is merely a second copy obtained by the plaintiff
from the chief of division of archives, without prior summons or notification of the vendor Estefania
Bustos, who was still living, in conformity with the provisions contained in article 18 of the Notarial Law
of February 15, 1889, and without the plaintiff's having explained what became of the first copy.
Besides, the clerk and notary who certified that instrument did not attest therein that in his presence
the vendee Cruzado paid over the sum of P2,200, the price of the land sold, and as the vendor denied
having received this sum, the obligation devolved upon plaintiff to prove that his deceased father had
paid the price stated in that instrument. By this not having done so, his omission constitutes additional
proof that the sale of the land, the recovery of possession of which plaintiff now seeks, was really
simulated.

The supreme court of Spain, in a decision dated February 20, 1899, rendered on an appeal in cassation,
laid down the doctrine that, in accordance with the provisions of article 40 of the Mortgage Law, in the
alienation of real property it is understood that no price has been paid if the notary does not attest its
delivery or the contracting parties do not prove that it was previously paid.

The courts are allowed full latitude to accept the presumption that the purchase price has not been paid
when the notary before whom the instrument was executed does not attest the delivery of the money,
and when, such delivery being denied by one of the contracting parties, the other does not adduce proof
of its payment, especially when such presumption is corroborated by other circumstantial evidence
which, all together, undoubtedly prove that the sale was feigned and simulated for certain purposes
sought to be attained by the parties, though, as in the case at bar, the simulation was not effected in
fraud of creditors.

Besides the failure to pay the purchase price, the record discloses another very important fact, to wit,
that neither the vendee nor his heirs, among these latter, the plaintiff, had at any time taken possession
of the land which in the said instrument Exhibit A appeared to have been sold, for, by the testimony of
seven competent witnesses examined at the trial it is decisively and conclusively proven that the alleged
vendor, Estefania Bustos, and her husband while he was living, notwithstanding the said alienation,
continued to possess the said land supposedly sold to plaintiff's father, and cultivated it, as she had done
long before the sale of September, 1875, and continued to do so up to the date of the complaint filed by
Santiago Cruzado; in the first period, until September 10, 1891, as the owner of the land, and from this
date, when the whole of the large tract of land of which the said portion apparently sold forms a part
was sold to the other defendant Manuel Escaler, the original owner Estefania Bustos continued in the
material possession of the land, but now as the lessee of the new owner, until 1908, when she was
substituted by Marcelo Rodriguez as the new lessee of the property. The plaintiff at no time after his
father's death occupied the land in litigation, notwithstanding his allegation that he has been collecting
rentals from Estefania Bustos, his mother-in-law, by reason of his having leased the land to her.

The plaintiff endeavored to prove that during the years 1882 and 1883 he personally took charge of and
tilled the disputed land on shares through his tenants named Florentino de los Reyes, Lino Cortes,
Macario de los Reyes and Regino de los Reyes, all of whom corroborated plaintiff's testimony in this
regard. However, six of the defendants' witnesses positively stated that they never were aware that the
said tenants had worked on the land in question during either the said two years or in any other, for
these latter were working on the adjacent lands belonging to other owners. Pablo Angeles, one of the
defendants' witnesses, testified that Regino and Florentino de los Reyes were his tenants on shares and
were employed on his land adjoining that in question. He was positively certain that they never worked
on the disputed land during or about the years aforementioned, because the carabaos used by his said
two tenants belonged to him and he never would have permitted them to use these animals in working
land that did not belong to him. He added that Regino's children, Macario and Basilio, were at that time
so young, being about eight years of age, that they were not yet able to work in the fields.

The plaintiff must have been well convinced that he had no right whatever in the land supposedly
purchased by his father. The latter never demanded its possession from its owner Estefania Bustos and
never thought of declaring the property as belonging to him, for the purposes of the land tax, from the
time this tax was established in this country, notwithstanding that the plaintiff, knowing his obligation,
filed a sworn declaration relative to a lot he owned in the municipality of Bacolor. This procedure of
plaintiff's proves that he did not believe himself to be the owner of the land he claims and which its
present owner Manuel Escaler has constantly declared for the purpose of assessment.

Moreover, about the middle of the year 1891, the plaintiff Santiago Cruzado begged his brother-in-law
Natalio Dizon to tell the latter's mother, plaintiff's mother-in-law, that Cruzado desired the lease four
balitas of the land in question, and some days afterwards, possibly because he received no reply from
his said brother-in-law, he addressed a letter to Dizon (Exhibit 9, page 152 of the record, translated on
page 154) in which he repeated his request and asked for a reply; but notwithstanding that his brother-
in-law Dizon told him that he could not dispose of any part of the said land for the reason that his
mother Estefania Bustos was negotiating for the sale of all the land she possessed in the sitio of Sicat to
Manuel Escaler, plaintiff went to Dizon's house on an occasion when Paulino de la Cruz was there. Cruz
was a representative of Escaler and had been charged to inform himself of the situation, condition and
quality of the land which Bustos was about to sell to his principal and was at the said house for the
purpose of being shown the land offered for sale. On this occasion plaintiff learned that negotiations
were being made for the sale of all the land owned by Estefania Bustos of which the 65 balitas in
litigation formed a part. Plaintiff did not then or afterwards make any statement or objection whatever
in defense of his rights and interest, if he really believed that he was entitled to the land shown in the
instrument Exhibit A to have been purchased by his father.

Plaintiff made no protest whatsoever, because he well knew that the said sale was simulated and that
his father had acquired no right whatever in the property; he was therefore anxious to lease four balitas
of the same land, a purpose in which he was unsuccessful because a deal was then already going
forward for the sale of the said land to its present owner, Manuel Escaler, who in fact did but it on
September 10, 1891. If plaintiff were convinced that he was the owner of the land, as he rashly asserted
that he was in his complaint for recovery of possession, it is not understood why about the middle of the
year 1891 he wished to lease, not all the 65 balitas, but only four of them, as stated in his said letter,
Exhibit 9.

From that time the new owner Manuel Escaler took possession of all the land sold by Estefania Bustos,
including the 65 balitas in litigation, and continued in its possession as the owner thereof until October
8, 1910, when plaintiff filed his claim. Thus, more than the ten years required by law for ordinary
prescription had already elapsed, as Escaler purchased the land and was holding it in good faith under a
lawful title and was not disturbed in his continuous and peaceable possession, one that was adverse to
the whole world. It is therefore unquestionable that he has absolutely acquired by prescription the
ownership of the disputed land, and the action brought by plaintiff, founded solely on a simulated sale
executed by the original owner of the land, not to the prejudice, but to the benefit, of the pretended
vendee, cannot prevail against Escaler's rights.

The registration obtained by the plaintiff in the property registry of the second copy of the said
instrument Exhibit A, about two months before filing his action for recovery, to wit, on August 23, 1910,
has not improved the deed of sale nor made it more effective, nor could it affect the rights held by the
original owner and the present proprietor of the land in question, inasmuch as their predecessor in
interest, by default of payment of the price of the sale and on account of his never having taken
possession of the land sold, was not the owner thereof, nor did he acquire any property right whatever
therein. Consequently at his death he could not have transmitted to the plaintiff as his successor any
greater right than a personal right to exact the fulfillment of a contract, and as plaintiff was not the
owner of the land, he could not validly register it.

Article 1473 of the Civil Code prescribes:

If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be personal property.

Should it be real property, it shall belong to the person acquiring it who first recorded it in the registry.

Should there be no entry, the property shall belong to the person who first took possession of it in good
faith, and, in the absence thereof, to the person who presents the oldest title, provided there is good
faith.

On the sale of the land to the defendant Escaler, neither he nor the plaintiff had had it entered in the
property registry, but the said new owner, Escaler, took possession of the land on the date of its
acquisition, September 10,1891, and has retained possession thereof up to the present time. So that
when plaintiff registered the land he was not in possession thereof and no longer had any right
whatever therein, because it already belonged to the defendant Escaler, its lawful owner.

However, even though it were proper for plaintiff to bring the real action for recovery derived, though
we do not admit that it could be, from the simulated sale before mentioned, both this action as well as
the personal action — the only one available in a proper case, as before demonstrated, pursuant to the
provisions of article 1095 of the Civil Code — have both certainly prescribed, for the reason that the
periods fixed by law for filing such actions have much more than elapsed.

Article 1939 of the Civil Code says:

Prescription, which began to run before the publication of this code, shall be governed by the prior laws;
but if, after this code became operative, all the time required in the same for prescription has elapsed, it
shall be effectual, even if according to said prior laws a longer period of time may be required.

Personal actions prescribe after ten years; and the same with the writ of execution therein issued, after
twenty years; while real actions prescribe after thirty years: according to Law 5, Title 8, Book 1 of the
Novisima Recopilacion, and Law 21, Title 29, Partida 3, which were those in force on the date of the
execution of the deed of sale, Exhibit A.

From September 7, 1875, to October 8, 1910, when the complaint was filed, thirty-five years have
elapsed. Therefore, not only in accordance with the laws aforecited, but also pursuant to the provisions
of articles 1963 and 1964 of the Civil Code, the periods fixed for the prescription of the personal action
which could, in a proper case, have been exercised, as well as for the real action for recovery of
possession brought by the plaintiff without right so to do, have more than prescribed.
For all the foregoing reasons, whereby the errors assigned to the judgment appealed from have been
duly refuted, the said judgment should be, as it is hereby, affirmed, with the costs against the appellant.
So ordered.

Arellano, C. J., Johnson, Carson, Moreland, Trent, and Araullo, JJ., concur.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-14040 January 31, 1961

SEGUNDA PORNELLOSA and JOSE ANGELES, petitioners,

vs.

THE LAND TENURE ADMINISRATION and HERMINIO GUZMAN, respondents.

Bustos Meneses and Pingol for petitioners.

Arturo M. Tolentino for respondents.

PADILLA, J.:

Petition for certiorari under Rule 46 to review a judgment of the Court of Appeals (C.A.-G.R. No. 13901-
R).

An action to compel the Director of Lands to execute a deed of sale of a residential lot in favor of the
petitioners upon payment of the purchase price of P1,505, to declare null and void a deed of sale of the
lot executed by the then Minister of Agriculture and Natural Resources in favor of the respondent
Herminio Guzman, to collect from the defendants the sum of P1,000 as actual and P5,000 as moral
damages, and to secure other just and equitable relief, was brought by the petitioners in the Court of
First Instance of Manila (civil No. 8695). After trial the Court rendered judgment in favor of the
petitioners granting them the relief prayed for except the amount of moral damages which was reduced
to P2,000. The trial court dismissed the defendant's counterclaim. They appealed and the Court of
Appeals rendered judgment reversing that of the Court of First Instance and dismissing the petitioners'
complaint (C.A.-G.R. No. 13901-R). Hence this petition for certiorari to review the judgment rendered by
the Court of Appeals.

The facts as found by the appellate court are:

The lot in controversy is a part of the Santa Clara Estate on which many families have settled through
the consent of its owner. Each paid a rental which, in all likelihood, was fixed proportionately to the
extent of the holding. There is no evidence whether or not an occupant was given a formal contract for
the specific portion he holds.

In May, 1941, the Santa Clara Estate was acquired by the Government under the provisions of
Commonwealth Act No. 539, section 1 of which recites thus:.

The President of the Philippines is authorized to acquire private lands or any interest therein, through
purchase or expropriation, and to subdivide the same into home lots or small farms for resale at
reasonable prices and under such conditions as he may fix to their bona fide tenants or occupants or to
private individuals who will work the lands themselves and who are qualified to acquire and own lands
in the Philippines.

The administration and disposition of the land so acquired was entrusted to an Office known as the
Rural Progress Administration.1 This Office was abolished later on and its functions were transferred to
the Bureau of Lands.2 Recently, such duties were given to the Land Tenure Administration.3

The evidence tends to show that on April 1, 1941 the plaintiffs acquired by purchase the rights of
occupation of the lot in question on the strength of a document which reads as follows:.

DAPAT MABATID NG MADLA:

Akong si VICENTA SAN JOSE, may sapat na gulang,walang asawa (balo), na nakatira sa daang Galicia,
Sampaloc,Maynila, ay pinatotohanan kong tinanggap ko ang halagang ISANG DAAN AT LIMANG PONG
PISO ) p150.00) kay Gng. Segunda Pornellosa bilang kabayaran sa aking bahay na nakatayo sa daang
Galicia, bilang 502. Kaya't isinasalin ko sa kanila ang boong kapangyarihan sa nasabing bahay, ganoon
din ang karapatan na sila na ang makikipag-unawaan sa Pamahalaan sa pag-bili ng nasabing lupa.

Sa katotohanan ay aking inilagda and aking pangalan sakasunduan ito sa harap ng mga saksi, at ganon
and tatak ng aking hinlalaki, ngayon ika 1 ng Abril ng 1941.

(FDO.) VICENTA SAN JOSE

SAKSI:.

MOISES SAN PEDRO"

(Exhibit A).

The vendor, Vicenta San Jose, was an old tenant thereof.After the purchase of the Santa Clara Estate by
the plaintiffs were allowed to make payments on account of the purchase price of the lot which, as
fenced, included two hundred (200) square meters. All the amounts so paid were duly receipted as
shows by Exhs. B, C, D, E, F, G, H and I. Following these payments the plaintiffs sent a check in the
amount of P200.00 but it was not accepted. Thereafter the plaintiffs found out that the lot, the right of
occupancy of which they had purchased from Vicenta San Jose, had been subdivided into two smaller
lots, Nos. 44 and 78, Block 12. Lot No. 44 had been sold to Herminio Guzman. The plaintiffs then filed a
complaint and, as a result, the investigator, Atty. Vizconde, recommended that the lot vacated by San
Jose be restored to them.

The evidence of the defendants is purely documentary. We do not deem it necessary to dwell thereon.

The appellate court held:.

Our discussion will be confined to the proposition of whether or not the plaintiffs are entitled to
purchase from the Government the lot formerly held by San Jose, allegedly including about two hundred
(200) square meters. The plaintiffs believe they are, relying mainly on the deed of sale executed by San
Jose in their favor (Exh. A). In that document, however, the area of the lot on which San Jose's house
stood had not been specified, nor had the boundaries thereof been mentioned. Any receipt for the
rentals paid San Jose to the old management of the Santa Clara Estate would have given us an idea of
the extent of her holding on the basis of the amount of the rent paid, but none was presented. The
plaintiffs presented a sketch, Exh. L-1, which allegedly represents the lot they claim. But his piece of
evidence is devoid of persuasive value, considering that the old subdivision plan was not offered.

Significantly, the plaintiffs cannot show a contract whereby the Rural Progress Administration has sold
or promised to sell them a lot of two hundred square meters. It is true that they hold receipts (Exhs. B,
C, D, E, F, G, H and I) for payments made on account of the purchase price of a lot, but in none of them
are the number of the lot and its area stated. On the contrary, a note was visible in all the said receipts,
except two, which reads: "subject to further re-adjustment." The plaintiffs claim that a certain Moises
San Pedro, Sr., supervisor of collectors of the Sta. Clara Estate, made them believe that the lot they had
purchase was, more or less, of 200 square meters, as enclosed by a fence at the time San Jose vacated it.
They furthermore claim that San Pedro explained that the note "subject to further re-adjustment"
appearing in their receipts meant that their lot would be increased or decreased should the proposed
extension of the adjoining street (the Lealtad St.)would eventually be carried out. It suffices to say that it
does not appear that San Pedro by his position in the Government had power to sell any of the lots
included in the Santa Clara Estate. It is obvious that such power resides only in the Chief of the Office in
charge of the disposition of lands acquired by the Government for resale to the needy. It would not be
amiss to state further that receipts of payment issued to other purchasers of lots not adjoining any
street invariably carries the warning: "subject to further re-adjustment.".
Pornellosa, one of the plaintiffs, was given lot No. 78 and she would not agree. She tried to convince us
that lot No. 44 was given to a wrong party, Herminio Guzman, who was not a bona fide occupant
thereof. Guzman might not have been a bona fide occupant, but the law does not bar him from
acquiring the lot, at least, as against the plaintiffs who have not satisfactorily established their right
thereto. The intention of the law in authorizing the acquisition of the Santa Clara Estate was to give
home to the homeless. Jose B. Angeles, the husband of Segunda Pornellosa and one of the plaintiffs
here, presently resides with his family in a house built on a lot included in the Santa Clara Estafa and
which had been sold to him by the government. The intention of the law, as stated, is to give home to
the homeless, and let that be a reality if we are to lend a contributing to the building of a strong and
law-abiding citizenry.

Now, for all the reasons stated above, we believe that the plaintiffs failed to establish their right to
compel the Director of Lands, now the Chairman of the Land Tenure Administration, to execute a deed
of sale conveying to them a residential lot as they claim in this action.

It appearing that the functions of the Bureau of Lands in the administration of lands acquired through
purchase or expropriation by the government for resale have passed to the Land Tenure Administration,
the Director of Lands, as one of the defendants here, is understood substituted by the Chairman of the
Land Tenure Administration, and all the pleadings are accordingly amended.

The finding of the Court of Appeals that the petitioners have failed to prove that lot 44 is included in the
lot formerly occupied by Vicenta San Jose, their predecessor-in-interest, is binding upon this Court. A
party claiming a right granted or created by law must prove his claim by competent evidence. A plaintiff
is duty bound to prove his allegations in the complaint. He must rely on the strength of his evidence and
not on the weakness of that of his opponent.

In their amended complaint, the petitioners, allege that they and their predecessor Vicenta San Jose,
from whom they bought the residential lot in litigation containing an area of 200 sq. m. more or less,
had been for many years in actual possession thereof, and that following the avowed policy of the
government to sell the lots acquired from the Santa Clara Estate, of which the residential lot in litigation
forms part, only to bona fide occupants or tenants thereof, the defunct Rural Progress Administration
agreed to sell to them the said residential lot (pp.1, 2-3, rec. on app.). Reviewing the petitioners'
evidence, the Court of Appeals found that in Exhibit A, the deed of sale executed by Vicenta San Jose in
favor of Pornellosa, "the area of the lot on which San Jose's house stood had not been specified, nor had
the boudaries thereof been mentioned;" and that there is no showing of the extent of the alleged
vendor's holding or interest. Besides, the petitioners have not presented any document or evidence
showing that the defunct Rural Progress Administration had agreed to sell to them the residential lot in
litigation. Granting that the respondent Herminio Guzman is not entitled to acquire by purchase the said
residential lot, still that fact does not relieve the petitioners from the duty of proving by competent
evidence the allegations of their complaint.

Moreover, the deed of sale (Exhibit A), allegedly executed by Vicenta San Jose in favor of Pornellosa is a
mere private document and does not conclusively establish their right to the parcel of land. While it is
valid and binding upon the parties with respect to the sale of the house erected thereon, yet it is not
sufficient to convey title or any right to the residential lot in litigation. Acts and contracts which have for
their object the creation, transmission, modification or extinguishment of real rights over immovable
property must appear in a public document.4

The petitioners having failed to prove their right to acquire lot 44 under Commonwealth Act No. 539
cannot compel the respondent, the Land Tenure Administration, to convey the lot to them.

The judgment under review is affirmed, with costs against the petitioners.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Gutierrez David and
Paredes, JJ., concur.

Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 77365 April 7, 1992

RITA CALEON, petitioner,

vs.

AGUS DEVELOPMENT CORPORATION and COURT OF APPEALS, respondents.

BIDIN, J.:

This is a petition for review on certiorari seeking the reversal of the January 28, 1987 decision of the
Court of Appeals in CA-G.R. SP No. 10990 entitled "Rita Caleon V. Hon. Samilo Barlongay, et al."
dismissing the petition for review of the decision of the Regional Trial Court of Manila, Branch 34, which
affirmed the decision of the Metropolitan Trial Court of Manila, Branch XII, ejecting the petitioner.
The undisputed facts of the case are as follows:

Private respondent Agus Development Corporation is the owner of a parcel of land denominated as Lot
39, Block 28, situated at 1611-1619 Lealtad, Sampaloc, Manila, which it leased to petitioner Rita Caleon
for a monthly rental of P180.00. Petitioner constructed on the lot leased a 4-door apartment building.

Without the consent of the private respondent, the petitioner sub-leased two of the four doors of the
apartment to Rolando Guevarra and Felicisima Estrada for a monthly rental of P350.00 each. Upon
learning of the sub-lease, private respondent through counsel demanded in writing that the petitioner
vacate the leased premises (Rollo, Annex "A", p. 20).

For failure of petitioner to comply with the demand, private respondent filed a complaint for ejectment
(Civil Case No. 048908) with the Metropolitan Trial Court of Manila, Branch XII against the petitioner
citing as ground therefor the provisions of Batas Pambansa Blg. 25, Section 5, which is the unauthorized
sub-leasing of part of the leased premises to third persons without securing the consent of the lessor
within the required sixty (60)-day period from the promulgation of the new law (B.P. 25). (Rollo,
Petition, p. 8).

After trial, the court a quo rendered its decision ordering petitioner and all persons claiming possession
under her (a) to vacate the premises alluded to in the complaint; (b) to remove whatever improvement
she introduced on the property; (c) to pay private respondent the amount of P2,000.00 as attorney's
fees; and (d) to pay the costs (Rollo, Annex "A", p. 19).

Petitioner appealed the decision to the Regional Trial Court and on November 24, 1980, presiding judge
of the RTC, the Hon. Samilo Barlongay, affirmed in toto the decision of the Metropolitan Trial Court
(Rollo, Annex "A", p. 19).

The decision of the Regional Trial Court was appealed to the Court of Appeals for review. The
respondent Court of Appeals rendered its decision dated January 28, 1987, the dispositive portion of
which reads as follows:

PREMISES CONSIDERED, the petition not being prima facie meritorious, the same is outright dismissed.
SO ORDERED. (Rollo, Annex "A", p. 21)

Hence, the petition for review on certiorari.

The principal issue in this case is whether or not the lease of an apartment includes a sublease of the lot
on which it is constructed, as would constitute a ground for ejectment under Batas Pambansa BLg. 25.

Petitioner is of the view that Batas Pambansa Blg. 25 is not applicable because what she leased was her
own apartment house which does not include a sublease of the lot she leased from private respondent
on which the apartment is constructed.

Petitioner's contention is untenable.

This issue has already been laid to rest in the case of Duellome v. Gotico (7 SCRA 841 [1963]) where this
Court ruled that the lease of a building naturally includes the lease of the lot, and the rentals of the
building includes those of the lot. Thus:

. . . the lease of a building would naturally include the lease of the lot and that the rentals of the building
include the rentals of the lot.

xxx xxx xxx

Furthermore, under our Civil Code, the occupancy of a building or house not only suggests but implies
the tenancy or possession in fact of the land on which they are constructed. This is not a new
pronouncement. An extensive elaboration of this rule was discussed by this Court in the case of
Baquiran, et al., v. Baquiran, et al., 53 O.G. p. 1130.
. . . the Court of Appeals should have found the herein appellees lessees of the house, and for all legal
purposes, of the lot on which it was built as well.

But petitioner insists that the ruling in the aforecited case is not applicable to the case at bar because
the former is a damage suit while the latter is an ejectment case.

Be that as it may, this Court has categorically answered in the affirmative, the principal question,
common to both cases and on which rests the resolution of the issues involved therein. Under the above
ruling it is beyond dispute that petitioner in leasing her apartment has also subleased the lot on which it
is constructed which lot belongs to private respondent. Consequently, she has violated the provisions of
Section 5, Batas Pambansa Blg. 25 which is a ground for Ejectment.

Section 5 of Batas Pambansa Blg. 25 enumerates the grounds for judicial ejectment, among which is the
subleasing of residential units without the written consent of the owner/lessor, to wit:

Se. 5 Grounds for judicial ejectment. Ejectment shall be allowed on the following grounds:

a) Subleasing or assignment of lease of residential units in whole or in part, with the written
consent of the owner/lessor: Provided that in the case of subleases or assignments executed prior to the
approval of this Act, the sublessor/assignor shall have sixty days from the effectivity of this Act within
which to obtain the written approval of the owner/lessor or terminate the sublease or assignment.

Section 2(b) of Batas Pambansa Blg. 25 defines the term residential unit as follows:

Sec. 2. Definition of Terms — Unless otherwise indicated wherever in this Act, the following shall have
the following meaning:

xxx xxx xxx

b. A residential unit — refers to an apartment, house and/or land on which another's dwelling is
located used for residential purposes and shall include not only buildings, parts or units thereof used
solely as dwelling places, except motels, motel rooms, hotels, hotel rooms, boarding houses,
dormitories, rooms and bedspaces for rent, but also those used for home industries, retail stores, or
other business purposes if the owner thereof and his family actually live therein and use it principally for
dwelling purposes: . . .

Petitioner argued further that Batas Pambansa Blg. 25 cannot be applied in this case because there is a
perfected contract of lease without any express prohibition on subleasing which had been in effect
between petitioner and private respondent long before the enactment of Batas Pambansa Blg. 25.
Therefore, the application of said law to the case at bar is unconstitutional as an impairment of the
obligation of contracts.

It is well settled that all presumptions are indulged in favor of constitutionality; one who attacks a
statute, alleging unconstitutionality must prove its invalidity beyond a reasonable doubt (Victoriano v.
Elizalde Rope Workers' Union, 59 SCRA 54 [1974]). In fact, this Court does not decide questions of a
constitutional nature unless that question is properly raised and presented in appropriate cases and is
necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota
presented (Tropical Homes, Inc. v. National Housing Authority, 152 SCRA 540 [1987]).

In any event, it is now beyond question that the constitutional guaranty of non-impairment of
obligations of contract is limited by and subject to the exercise of police power of the state in the
interest of public health, safety, morals and general welfare (Kabiling, et al. v. National Housing
Authority, 156 SCRA 623 [1987]). In spite of the constitutional prohibition, the State continues to
possess authority to safeguard the vital interests of its people. Legislation appropriate to safeguarding
said interest may modify or abrogate contracts already in effect (Victoriano v. Elizalde Rope Workers'
Union, et al., supra). In fact, every contract affecting public interest suffers a congenital infirmity in that
it contains an implied reservation of the police power as a postulate of the existing legal order. This
power can be activated at anytime to change the provisions of the contract, or even abrogate it entirely,
for the promotion or protection of the general welfare. Such an act will not militate against the
impairment clause, which is subject to and limited by the paramount police power (Villanueva v.
Castañeda, 154 SCRA 142 [1987]).

Batas Pambansa Blg. 25, "An Act Regulating Rentals of Dwelling Units or of Land On Which Another's
Dwelling is Located and For Other Purposes" shows that the subject matter of the law is the regulation
of rentals and is intended only for dwelling units with specified monthly rentals constructed before the
law became effective (Baens v. Court of Appeals, 125 SCRA 634 [1983]).

Batas Pambansa Blg. 25 is derived from P.D. No. 20 which has been declared by this Court as a police
power legislation, applicable to leases entered into prior to July 14, 1971 (effectivity date of RA 6539), so
that the applicability thereof to existing contracts cannot be denied (Gutierrez v. Cantada, 90 SCRA 1
[1979]).
Finally, petitioner invokes, among others, the promotion of social justice policy of the New Constitution.
Like P.D. No. 20, the objective of Batas Pambansa Blg. 25 is to remedy the plight of lessees, but such
objective is not subject to exploitation by the lessees for whose benefit the law was enacted. Thus, the
prohibition provided for in the law against the sublease of the premises without the consent of the
owner. As enunciated by this Court, it must be remembered that social justice cannot be invoked to
trample on the rights of property owners, who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our Constitution was not intended to take away rights from
a person and give them to another who is not entitled thereto (Salonga v. Farrales, 105 SCRA 360
[1981]).

WHEREFORE, the Petition is Denied for lack of merit and the assailed decision of the Court of Appeals is
Affirmed.

SO ORDERED.

PHILIPPINE SUPREME COURT DECISIONS

EN BANC

[G.R. No. L-27454. April 30, 1970.]

ROSENDO O. CHAVES, Plaintiff-Appellant, v. FRUCTUOSO GONZALES, Defendant-Appellee.

Chaves, Elio, Chaves & Associates, for Plaintiff-Appellant.

Sulpicio E. Platon, for Defendant-Appellee.

SYLLABUS
1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR NON-PERFORMANCE; FIXING OF PERIOD BEFORE
FILING OF COMPLAINT FOR NON-PERFORMANCE, ACADEMIC.— Where the time for compliance had
expired and there was breach of contract by non-performance, it was academic for the plaintiff to have
first petitioned the court to fix a period for the performance of the contract before filing his complaint.

2. ID.; ID.; ID.; DEFENDANT CANNOT INVOKE ARTICLE 1197 OF THE CIVIL CODE OF THE PHILIPPINES.—
Where the defendant virtually admitted non-performance of the contract by returning the typewriter
that he was obliged to repair in a non-working condition, with essential parts missing, Article 1197 of the
Civil Code of the Philippines cannot be invoked. The fixing of a period would thus be a mere formality
and would serve no purpose than to delay.

3. ID.; ID.; ID.; DAMAGES RECOVERABLE; CASE AT BAR.— Where the defendant-appellee contravened
the tenor of his obligation because he not only did not repair the typewriter but returned it "in
shambles,’’ he is liable for the cost of the labor or service expended in the repair of the typewriter,
which is in the amount of P58.75, because the obligation or contract was to repair it. In addition, he is
likewise liable under Art. 1170 of the Code, for the cost of the missing parts, in the amount of P31.10,
for in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the
same condition it was when he received it.

4. ID.; ID.; ID.; CLAIMS FOR DAMAGES OR ATTORNEY’S FEES NOT RECOVERABLE; NOT ALLEGED OR
PROVED IN INSTANT CASE.— Claims for damages and attorney’s fees must be pleaded, and the
existence of the actual basis thereof must be proved. As no findings of fact were made on the claims for
damages and attorney’s fees, there is no factual basis upon which to make an award therefor.

5. REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF FIRST INSTANCE TO SUPREME COURT; ONLY
QUESTIONS OF LAW REVIEWABLE.— Where the appellant directly appeals from the decision of the trial
court to the Supreme Court on questions of law, he is bound by the judgment of the court a quo on its
findings of fact.

DECISION
REYES, J.B.L., J.:

This is a direct appeal by the party who prevailed in a suit for breach of oral contract and recovery of
damages but was unsatisfied with the decision rendered by the Court of First Instance of Manila, in its
Civil Case No. 65138, because it awarded him only P31.10 out of his total claim of P690 00 for actual,
temperate and moral damages and attorney’s fees.

The appealed judgment, which is brief, is hereunder quoted in full:jgc:chanrobles.com.ph

"In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a
portable typewriter for routine cleaning and servicing. The defendant was not able to finish the job after
some time despite repeated reminders made by the plaintiff. The defendant merely gave assurances,
but failed to comply with the same. In October, 1963, the defendant asked from the plaintiff the sum of
P6.00 for the purchase of spare parts, which amount the plaintiff gave to the defendant. On October 26,
1963, after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the
house of the defendant and asked for the return of the typewriter. The defendant delivered the
typewriter in a wrapped package. On reaching home, the plaintiff examined the typewriter returned to
him by the defendant and found out that the same was in shambles, with the interior cover and some
parts and screws missing. On October 29, 1963. the plaintiff sent a letter to the defendant formally
demanding the return of the missing parts, the interior cover and the sum of P6.00 (Exhibit D). The
following day, the defendant returned to the plaintiff some of the missing parts, the interior cover and
the P6.00.

"On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the
repair job cost him a total of P89.85, including labor and materials (Exhibit C).

"On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding
from the defendant the payment of P90.00 as actual and compensatory damages, P100.00 for
temperate damages, P500.00 for moral damages, and P500.00 as attorney’s fees.

"In his answer as well as in his testimony given before this court, the defendant made no denials of the
facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the defendant
through a certain Julio Bocalin, which the defendant denied allegedly because the typewriter was
delivered to him personally by the plaintiff.

"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should
not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C, shows that the
missing parts had a total value of only P31.10.

"WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of
P31.10, and the costs of suit.

"SO ORDERED."cralaw virtua1aw library

The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded
only the value of the missing parts of the typewriter, instead of the whole cost of labor and materials
that went into the repair of the machine, as provided for in Article 1167 of the Civil Code, reading as
follows:jgc:chanrobles.com.ph

"ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore it may be decreed that what has been poorly done he undone."cralaw virtua1aw library

On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable at
all, not even for the sum of P31.10, because his contract with plaintiff-appellant did not contain a
period, so that plaintiff-appellant should have first filed a petition for the court to fix the period, under
Article 1197 of the Civil Code, within which the defendant appellee was to comply with the contract
before said defendant-appellee could be held liable for breach of contract.

Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose any
appeal, the facts, as found by the trial court, are now conclusive and non-reviewable. 1
The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter for
routine cleaning and servicing" ; that the defendant was not able to finish the job after some time
despite repeated reminders made by the plaintiff" ; that the "defendant merely gave assurances, but
failed to comply with the same" ; and that "after getting exasperated with the delay of the repair of the
typewriter", the plaintiff went to the house of the defendant and asked for its return, which was done.
The inferences derivable from these findings of fact are that the appellant and the appellee had a
perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was to
finish it at some future time although such time was not specified; and that such time had passed
without the work having been accomplished, far the defendant returned the typewriter cannibalized
and unrepaired, which in itself is a breach of his obligation, without demanding that he should be given
more time to finish the job, or compensation for the work he had already done. The time for compliance
having evidently expired, and there being a breach of contract by non-performance, it was academic for
the plaintiff to have first petitioned the court to fix a period for the performance of the contract before
filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually
admitted non-performance by returning the typewriter that he was obliged to repair in a non-working
condition, with essential parts missing. The fixing of a period would thus be a mere formality and would
serve no purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad Co. 98 Phil. 18l).

It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did
not repair the typewriter but returned it "in shambles", according to the appealed decision. For such
contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam quot, for the
cost of executing the obligation in a proper manner. The cost of the execution of the obligation in this
case should be the cost of the labor or service expended in the repair of the typewriter, which is in the
amount of P58.75. because the obligation or contract was to repair it.

In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the
missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but
failed or neglected, to return it in the same condition it was when he received it.

Appellant’s claims for moral and temperate damages and attorney’s fees were, however, correctly
rejected by the trial court, for these were not alleged in his complaint (Record on Appeal, pages 1-5).
Claims for damages and attorney’s fees must be pleaded, and the existence of the actual basis thereof
must be proved. 2 The appealed judgment thus made no findings on these claims, nor on the fraud or
malice charged to the appellee. As no findings of fact were made on the claims for damages and
attorney’s fees, there is no factual basis upon which to make an award therefor. Appellant is bound by
such judgment of the court, a quo, by reason of his having resorted directly to the Supreme Court on
questions of law.
IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the
defendant-appellee to pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85,
with interest at the legal rate from the filing of the complaint. Costs in all instances against appellee
Fructuoso Gonzales.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and Villamor, JJ., concur.

FIRST DIVISION

[G.R. No. 117190. January 2, 1997]

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE JR., respondents.

DECISION

BELLOSILLO, J.:

This case involves the proper interpretation of the contract entered into between the parties.

Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J. M. T.
Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a
windmill system for him. After some negotiations they agreed on the construction of the windmill for a
consideration of P60,000.00 with a one-year guaranty from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the agreement respondent paid petitioner a down
payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.

On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a
complaint to collect the amount. In his Answer before the trial court respondent denied the claim saying
that he had already paid this amount to the San Pedro General Merchandising Inc. (SPGMI) which
constructed the deep well to which the windmill system was to be connected. According to respondent,
since the deep well formed part of the system the payment he tendered to SPGMI should be credited to
his account by petitioner. Moreover, assuming that he owed petitioner a balance of P15,000.00, this
should be offset by the defects in the windmill system which caused the structure to collapse after a
strong wind hit their place.[1]

Petitioner denied that the construction of a deep well was included in the agreement to build the
windmill system, for the contract price of P60,000.00 was solely for the windmill assembly and its
installation, exclusive of other incidental materials needed for the project. He also disowned any
obligation to repair or reconstruct the system and insisted that he delivered it in good and working
condition to respondent who accepted the same without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of any liability.

In finding for plaintiff, the trial court held that the construction of the deep well was not part of the
windmill project as evidenced clearly by the letter proposals submitted by petitioner to respondent.[2] It
noted that "[i]f the intention of the parties is to include the construction of the deep well in the project,
the same should be stated in the proposals. In the absence of such an agreement, it could be safely
concluded that the construction of the deep well is not a part of the project undertaken by the
plaintiff."[3] With respect to the repair of the windmill, the trial court found that "there is no clear and
convincing proof that the windmill system fell down due to the defect of the construction."[4]

The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was
included in the agreement of the parties because the term "deep well" was mentioned in both
proposals. It also gave credence to the testimony of respondent's witness Guillermo Pili, the proprietor
of SPGMI which installed the deep well, that petitioner Tanguilig told him that the cost of constructing
the deep well would be deducted from the contract price of P60,000.00. Upon these premises the
appellate court concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual obligation. However, it
rejected petitioner's claim of force majeure and ordered the latter to reconstruct the windmill in
accordance with the stipulated one-year guaranty.

His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief
from this Court. He raises two issues: firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether petitioner is under obligation to
reconstruct the windmill after it collapsed.

We reverse the appellate court on the first issue but sustain it on the second.

The preponderance of evidence supports the finding of the trial court that the installation of a deep well
was not included in the proposals of petitioner to construct a windmill system for respondent. There
were in fact two (2) proposals: one dated 19 May 1987 which pegged the contract price at P87,000.00
(Exh. "1"). This was rejected by respondent. The other was submitted three days later, i.e., on 22 May
1987 which contained more specifications but proposed a lower contract price of P60,000.00 (Exh. "A").
The latter proposal was accepted by respondent and the construction immediately followed. The
pertinent portions of the first letter-proposal (Exh. "1") are reproduced hereunder -

In connection with your Windmill System and Installation, we would like to quote to you as follows:

One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter, with
20 pieces blade, Tower 40 feet high, including mechanism which is not advisable to operate during
extra-intensity wind. Excluding cylinder pump.

UNIT CONTRACT PRICE P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system Supply of Labor Materials and Installation, operated water
pump, we would like to quote to you as follows -

One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet diameter, 1-
lot blade materials, 40 feet Tower complete with standard appurtenances up to Cylinder pump, shafting
U.S. adjustable International Metal.

One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.

One (1) lot - Float valve.

One (1) lot - Concreting materials foundation.

F. O. B. Laguna

Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither
is there an itemization or description of the materials to be used in constructing the deep well. There is
absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed
windmill system. The contract prices fixed in both proposals cover only the features specifically
described therein and no other. While the words "deep well" and "deep well pump" are mentioned in
both, these do not indicate that a deep well is part of the windmill system. They merely describe the
type of deep well pump for which the proposed windmill would be suitable. As correctly pointed out by
petitioner, the words "deep well" preceded by the prepositions "for" and "suitable for" were meant only
to convey the idea that the proposed windmill would be appropriate for a deep well pump with a
diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep well in the agreement
to construct a windmill, he would have used instead the conjunctions "and" or "with." Since the terms of
the instruments are clear and leave no doubt as to their meaning they should not be disturbed.

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be
accorded primordial consideration[5] and, in case of doubt, their contemporaneous and subsequent acts
shall be principally considered.[6] An examination of such contemporaneous and subsequent acts of
respondent as well as the attendant circumstances does not persuade us to uphold him.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that since petitioner did not have the capacity to install
the pump the latter agreed to have a third party do the work the cost of which was to be deducted from
the contract price. To prove his point, he presented Guillermo Pili of SPGMI who declared that petitioner
Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a deep well pump
as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig."[7]
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter
is unsubstantiated. The alleged letter was never presented in court by private respondent for reasons
known only to him. But granting that this written communication existed, it could not have simply
contained a request for Pili to install a deep well; it would have also mentioned the party who would pay
for the undertaking. It strains credulity that respondent would keep silent on this matter and leave it all
to petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill construction
and that its payment would come from the contract price of P60,000.00.

We find it also unusual that Pili would readily consent to build a deep well the payment for which would
come supposedly from the windmill contract price on the mere representation of petitioner, whom he
had never met before, without a written commitment at least from the former. For if indeed the deep
well were part of the windmill project, the contract for its installation would have been strictly a matter
between petitioner and Pili himself with the former assuming the obligation to pay the price. That it was
respondent Herce Jr. himself who paid for the deep well by handing over to Pili the amount of
P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but
a separate agreement between respondent and Pili. Besides, if the price of P60,000.00 included the
deep well, the obligation of respondent was to pay the entire amount to petitioner without prejudice to
any action that Guillermo Pili or SPGMI may take, if any, against the latter. Significantly, when asked why
he tendered payment directly to Pili and not to petitioner, respondent explained, rather lamely, that he
did it "because he has (sic) the money, so (he) just paid the money in his possession."[8]

Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear
that "payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it,".[9] It does not appear from the record that
Pili and/or SPGMI was so authorized.

Respondent cannot claim the benefit of the law concerning "payments made by a third person."[10] The
Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between
petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction of the deep
well. Specifically, witness Pili did not testify that he entered into a contract with petitioner for the
construction of respondent's deep well. If SPGMI was really commissioned by petitioner to construct the
deep well, an agreement particularly to this effect should have been entered into.

The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's
assertions. These circumstances only show that the construction of the well by SPGMI was for the sole
account of respondent and that petitioner merely supervised the installation of the well because the
windmill was to be connected to it. There is no legal nor factual basis by which this Court can impose
upon petitioner an obligation he did not expressly assume nor ratify.

The second issue is not a novel one. In a long line of cases[11] this Court has consistently held that in
order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the
Civil Code the event should be the sole and proximate cause of the loss or destruction of the object of
the contract. In Nakpil vs. Court of Appeals,[12] four (4) requisites must concur: (a) the cause of the
breach of the obligation must be independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or
aggravation of the injury to the creditor.

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event.
Interestingly, the evidence does not disclose that there was actually a typhoon on the day the windmill
collapsed. Petitioner merely stated that there was a "strong wind." But a strong wind in this case cannot
be fortuitous - unforeseeable nor unavoidable. On the contrary, a strong wind should be present in
places where windmills are constructed, otherwise the windmills will not turn.

The appellate court correctly observed that "given the newly-constructed windmill system, the same
would not have collapsed had there been no inherent defect in it which could only be attributable to the
appellee."[13] It emphasized that respondent had in his favor the presumption that "things have
happened according to the ordinary course of nature and the ordinary habits of life."[14] This
presumption has not been rebutted by petitioner.

Finally, petitioner's argument that private respondent was already in default in the payment of his
outstanding balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him.[15] When the windmill failed to function properly it
became incumbent upon petitioner to institute the proper repairs in accordance with the guaranty
stated in the contract. Thus, respondent cannot be said to have incurred in delay; instead, it is petitioner
who should bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is
explicit on this point that if a person obliged to do something fails to do it, the same shall be executed at
his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay
petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the
date of the filing of the complaint. In return, petitioner is ordered to "reconstruct subject defective
windmill system, in accordance with the one-year guaranty"[16]and to complete the same within three
(3) months from the finality of this decision.

SO ORDERED.

SUPREME COURT

Manila

THIRD DIVISION
G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,

vs.

COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees.

Gutierrez, Cortes & Gonzales for petitioners.

Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident
Insurance Policy No. PA-20015, respondent insurance company unilaterally cancelled the same since
company records revealed that petitioner-insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously
cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the
cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were not
remitted by Teofilo M. Malapit, respondent insurance company's branch manager.

These, in brief, are the material facts that gave rise to the action for damages due to breach of contract
instituted by petitioner-insured before

Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to
payment of damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever liability for damages it may
have to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer
from Dagupan City, bought, through

the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as
Prudential), a personal accident insurance policy covering the one-year period between noon of
November 28, 1984 and noon of November 28, 1985. 1 Under the terms of the statement of account
issued by respondent insurance company, petitioner-insured was supposed to pay the total amount of
P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25 and 2% premium
tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is legibly
printed:

This Statement of Account must not be considered a receipt. Official Receipt will be issued to you upon
payment of this account.

If payment is made to our representative, demand for a Provisional Receipt and if our Official Receipts is
(sic) not received by you within 7 days please notify us.

If payment is made to our office, demand for an OFFICIAL RECEIPT.

On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300
to petitioner-insured for the amount of P1,609.65 3 On the lower portion of the receipt the following is
written in capital letters:
Note: This collector's provisional receipt will be confirmed by our official receipt. If our official receipt
is not received by you within 7 days, please notify us. 4

On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit,
sent petitioner-insured Endorsement

No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as
of inception dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus
documentary stamps and premium tax" to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of
respondent insurance company, and demanded the issuance of an official receipt. Ang told petitioner-
insured that the cancellation of the policy was a mistake but he would personally see to its rectification.
However, petitioner-insured failed to receive any official receipt from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that
he be insured under the same terms and conditions as those contained in Policy No. PA-BG-20015
commencing upon its receipt of his letter, or that the current commercial rate of increase on the
payment he had made under provisional receipt No. 9300 be returned within five days. 6 Areola also
warned that should his demands be unsatisfied, he would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial
payment" of P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of
the Short Period Rate Scale" printed at the back of the policy. Malapit warned Areola that should be fail
to pay the balance, the company's liability would cease to operate. 7

In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its
Assistant Vice-President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the
company was verifying whether the payment had in fact been issued therefor. Ampil emphasized that
the official receipt should have been issued seven days from the issuance of the provisional receipt but
because no official receipt had been issued in Areola's name, there was reason to believe that no
payment had been made. Apologizing for the inconvenience, Ampil expressed the company's concern by
agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this
matter is cleared." 8
On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered
by provisional receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil
informed

Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or one
year from the date when payment was received." Apologizing again for the inconvenience caused
Areola, Ampil exhorted him to indicate his conformity to the proposal by signing on the space provided
for in the letter. 9

The letter was personally delivered by Carlito Ang to Areola on

August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a
complaint for breach of contract with damages before the lower court.

In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's
policy was due to the failure of Malapit to turn over the premiums collected, for which reason no official
receipt was issued to him. However, it argued that, by acknowledging the inconvenience caused on
petitioner-insured and after taking steps to rectify its omission by reinstating the cancelled policy prior
to the filing of the complaint, respondent insurance company had complied with its obligation under the
contract. Hence, it concluded that petitioner-insured no longer has a cause of action against it. It insists
that it cannot be held liable for damages arising from breach of contract, having demonstrated fully well
its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering
respondent insurance company to pay the former the following:

a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;

2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and

3. To pay the costs.

In its decision, the court below declared that respondent insurance company acted in bad faith in
unilaterally cancelling subject insurance policy, having done so only after seven months from the time
that it had taken force and effect and despite the fact of full payment of premiums and other charges on
the issued insurance policy. Cancellation from the date of the policy's inception, explained the lower
court, meant that the protection sought by petitioner-insured from the risks insured against was never
extended by respondent insurance company. Had the insured met an accident at the time, the insurance
company would certainly have disclaimed any liability because technically, the petitioner could not have
been considered insured. Consequently, the trial court held that there was breach of contract on the
part of respondent insurance company, entitling petitioner-insured to an award of the damages prayed
for.

This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in
unilaterally cancelling subject insurance policy.

After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court,
convinced that the latter had erred in finding respondent insurance company in bad faith for the
cancellation of petitioner-insured's policy. According to the Court of Appeals, respondent insurance
company was not motivated by negligence, malice or bad faith in cancelling subject policy. Rather, the
cancellation of the insurance policy was based on what the existing records showed, i.e., absence of an
official receipt issued to petitioner-insured confirming payment of premiums. Bad faith, said the Court of
Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of which
must be established convincingly. On the contrary, it further observed, the following acts indicate that
respondent insurance company did not act precipitately or willfully to inflict a wrong on petitioner-
insured:

(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the
premium; (b) the letter of August 3, 1985 confirming that the premium had been paid on December 17,
1984; (c) the reinstatement of the policy with a proposal to extend its effective period to December 17,
1985; and (d) respondent insurance company's apologies for the "inconvenience" caused upon
petitioner-insured. The appellate court added that respondent insurance company even relieved
Malapit, its Baguio City manager, of his job by forcing him to resign.
Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals
denied. Hence, this petition for review on certiorari anchored on these arguments:

Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious and
reversible error in not holding Respondent Prudential liable for the cancellation of the insurance
contract which was admittedly caused by the fraudulent acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and abused its discretion in ruling
that the defenses of good faith and honest mistake can co-exist with the admitted fraudulent acts and
evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not finding that even without considering
the fraudulent acts of its own officer in misappropriating the premium payment, the act itself in
cancelling the insurance policy was done with bad faith and/or gross negligence and wanton attitude
amounting to bad faith, because among others, it was

Mr. Malapit — the person who committed the fraud — who sent and signed the notice of cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to law and applicable
decision of the Supreme Court when it refused to award damages in favor of herein Petitioner-
Appellants.
It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance
company's branch office in Baguio, in misappropriating his premium payments is the proximate cause of
the cancellation of the insurance policy. Petitioner-insured theorized that Malapit's act of signing and
even sending the notice of cancellation himself, notwithstanding his personal knowledge of petitioner-
insured's full payment of premiums, further reinforces the allegation of bad faith. Such fraudulent act
committed by Malapit, argued petitioner-insured, is attributable to respondent insurance company, an
artificial corporate being which can act only through its officers or employees. Malapit's actuation,
concludes petitioner-insured, is therefore not separate and distinct from that of respondent-insurance
company, contrary to the view held by the Court of Appeals. It must, therefore, bear the consequences
of the erroneous cancellation of subject insurance policy caused by the non-remittance by its own
employee of the premiums paid. Subsequent reinstatement, according to petitioner-insured, could not
possibly absolve respondent insurance company from liability, there being an obvious breach of
contract. After all, reasoned out petitioner-insured, damage had already been inflicted on him and no
amount of rectification could remedy the same.

Respondent insurance company, on the other hand, argues that where reinstatement, the equitable
relief sought by petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the
complaint, petitioner-insured is left without a cause of action on which to predicate his claim for
damages. Reinstatement, it further explained, effectively restored petitioner-insured to all his rights
under the policy. Hence, whatever cause of action there might have been against it, no longer exists and
the consequent award of damages ordered by the lower court in unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums

paid by petitioner-insured is beyond doubt directly imputable to respondent insurance company. A
corporation, such as respondent insurance company, acts solely thru its employees. The latters' acts are
considered as its own for which it can be held to account. 11 The facts are clear as to the relationship
between private respondent insurance company and Malapit. As admitted by private respondent
insurance company in its answer, 12 Malapit was the manager of its Baguio branch. It is beyond doubt
that he represented its interest and acted in its behalf. His act of receiving the premiums collected is
well within the province of his authority. Thus, his receipt of said premiums is receipt by private
respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil
Code, is bound by the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which the agent may have contracted
within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when
he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent
insurance company; no exoneration from liability could result therefrom. The fact that private
respondent insurance company was itself defrauded due to the anomalies that took place in its Baguio
branch office, such as the non-accrual of said premiums to its account, does not free the same from its
obligation to petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing the ruling in
McIntosh v. Dakota Trust Co.: 14

A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of
dealings of the officers in their representative capacity but not for acts outside the scope of their
authority. A bank holding out its officers and agent as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment;
nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to
the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent acting within the general scope of his
authority even though, in the particular case, the agent is secretly abusing his authority and attempting
to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit.

Consequently, respondent insurance company is liable by way of damages for the fraudulent acts
committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy. Its
earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitioner-insured.
Respondent company should be reminded that a contract of insurance creates reciprocal obligations for
both insurer and insured. Reciprocal obligations are those which arise from the same cause and in which
each party is both a debtor and a creditor of the other, such that the obligation of one is dependent
upon the obligation of the other. 15

Under the circumstances of instant case, the relationship as creditor and debtor between the parties
arose from a common cause: i.e., by reason of their agreement to enter into a contract of insurance
under whose terms, respondent insurance company promised to extend protection to petitioner-
insured against the risk insured for a consideration in the form of premiums to be paid by the latter.
Under the law governing reciprocal obligations, particularly the second paragraph of Article 1191, 16 the
injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission of the
obligation in case one of the obligors, such as respondent insurance company, fails to comply with what
is incumbent upon him. However, said article entitles the injured party to payment of damages,
regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is
reinstatement insurance company's argument, namely, that reinstatement being equivalent to
fulfillment of its obligation, divests petitioner-insured of a rightful claim for payment of damages. Such a
claim finds no support in our laws on obligations and contracts.

The nature of damages to be awarded, however, would be in the form of nominal damages 17 contrary
to that granted by the court below. Although the erroneous cancellation of the insurance policy
constituted a breach of contract, private respondent insurance company, within a reasonable time took
steps to rectify the wrong committed by reinstating the insurance policy of petitioner. Moreover, no
actual or substantial damage or injury was inflicted on petitioner Areola at the time the insurance policy
was cancelled. Nominal damages are "recoverable where a legal right is technically violated and must be
vindicated against an invasion that has produced no actual present loss of any kind, or where there has
been a breach of contract and no substantial injury or actual damages whatsoever have been or can be
shown. 18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of
Appeals in CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan City,
in Civil Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following
modifications: (a) that nominal damages amounting to P30,000.00 be awarded petitioner in lieu of the
damages adjudicated by court a quo; and (b) that in the satisfaction of the damages awarded therein,
respondent insurance company is ORDERED to pay the legal rate of interest computed from date of
filing of complaint until final payment thereof.

SO ORDERED.