EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC.

, petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision of the Court of

1

Appeals involving questions in the resolution of which the respondent appellate court analyzed and interpreted particular
2

provisions of our laws on contracts and sales. In its assailed decision, the respondent court reversed the trial court which,
3

in dismissing the complaint for specific performance with damages and annulment of contract, found the option clause in
4

the lease contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo &
Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and unsupported by a consideration and the
subsequent sale of the subject property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have
been made without any breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost verbatim the basis
of the statement of facts as rendered by the petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M
Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of
Carmelo's property particularly described, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 150 square meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter constructed
on the leased property a movie house known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease of
another portion of Carmelo's property, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,064 square meters.

THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey
building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and
bearing street numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie house
known as "Miramar Theatre" on this leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-
days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE,
the LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the
Deed of Sale hereof that the purchaser shall recognize this lease and be bound by all the terms
and conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through
a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr. Pascal told
Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars 1,200,000, and Mr.
Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied through
a letter stating as follows:
 It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang
through the telephone that your company desires to sell your above-mentioned C.M. Recto
Avenue property.

Under your company's two lease contracts with our client, it is uniformly provided:

8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given
30-days exclusive option to purchase the same. In the event, however, that the leased
premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as
it is (sic) herebinds (sic) and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not
only the leased premises but "the entire building and other improvements if the price is reasonable. However,
both Carmelo and Equatorial questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which included
the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute
Sale, for the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale of the
leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a) that it had
informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to Mayfair, but
the latter answered that it was interested only in buying the areas under lease, which was impossible since the
property was not a condominium; and (b) that the option to purchase invoked by Mayfair is null and void for lack
of consideration. Equatorial, in its Answer, pleaded as special and affirmative defense that the option is void for
lack of consideration (sic) and is unenforceable by reason of its impossibility of performance because the leased
premises could not be sold separately from the other portions of the land and building. It counterclaimed for
cancellation of the contracts of lease, and for increase of rentals in view of alleged supervening extraordinary
devaluation of the currency. Equatorial likewise cross-claimed against co-defendant Carmelo for indemnification
in respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:

1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in
favor of defendant Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff
exclusive option to purchase the leased premises should the lessor desire to sell the same
(admitted subject to the contention that the stipulation is null and void);

3. That the two buildings erected on this land are not of the condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of
lease constitute the consideration for the plaintiff's occupancy of the leased premises, subject
of the same contracts of lease, Exhibits A and B;

xxx xxx xxx

6. That there was no consideration specified in the option to buy embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;

8. That the leased premises constitute only the portions actually occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and
the two buildings erected thereon.

xxx xxx xxx

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

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

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

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

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

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all
persons claiming rights under these contracts are directed to vacate the premises. 6

The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be an option clause
which however cannot be deemed to be binding on Carmelo because of lack of distinct consideration therefor.

The court a quo ratiocinated:

Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is not
supported by a separate consideration. Without a consideration, the option is therefore not binding on defendant
Carmelo & Bauermann to sell the C.M. Recto property to the former. The option invoked by the plaintiff appears
in the contracts of lease . . . in effect there is no option, on the ground that there is no consideration. Article 1352
of the Civil Code, provides:

Contracts without cause or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:

When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn
at any time before acceptance by communicating such withdrawal, except when the option is
founded upon consideration, as something paid or promised.

in relation with Article 1479 of the same Code:

A promise to buy and sell a determine thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determine thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.

The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the
existence of a distinct consideration. In other words, the promisee has the burden of proving the consideration.
The consideration cannot be presumed as in Article 1354:

Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless
the debtor proves the contrary.

where consideration is legally presumed to exists. Article 1354 applies to contracts in general, whereas when it
comes to an option it is governed particularly and more specifically by Article 1479 whereby the promisee has the
burden of proving the existence of consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor,
45 SCRA 368, 372-373, the Court said:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479
refers to sales in particular, and, more specifically, to an accepted unilateral promise to buy or
to sell. In other words, Article 1479 is controlling in the case at bar.
 (2) In order that said unilateral promise may be binding upon the promissor, Article 1479
requires the concurrence of a condition, namely, that the promise be supported by a
consideration distinct from the price.

Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the
former establishes the existence of said distinct consideration. In other words, the promisee
has the burden of proving such consideration. Plaintiff herein has not even alleged the
existence thereof in his complaint. 7

It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to the
former.

Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court of Appeals.
Respondent appellate court reversed the court a quo and rendered judgment:

1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of
P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty Development,
Inc. to accept such payment;

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the deeds
and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered under TCT
Nos. 17350, 118612, 60936, and 52571; and

4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged, declaring the Deed
of Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty
Development, Inc. as valid and binding upon all the parties. 8

Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between Article
1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and concluded that since
paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the leased premises, which is an
essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and not an
option contract. It explicated:

Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil Code.

Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a certain
period. Under this article, the offer may be withdrawn by the offeror before the expiration of the period and while
the offeree has not yet accepted the offer. However, the offer cannot be withdrawn by the offeror within the period
if a consideration has been promised or given by the offeree in exchange for the privilege of being given that
period within which to accept the offer. The consideration is distinct from the price which is part of the offer. The
contract that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme court,
citing Bouvier, defined an option as follows: "A contract by virtue of which A, in consideration of the payment of a
certain sum to B, acquires the privilege of buying from or selling to B, certain securities or properties within a
limited time at a specified price," (pp. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or to
sell a determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a
consideration distinct from the price." That "unilateral promise to buy or to sell a determinate thing for a price
certain" is called an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil.
217). To constitute a legal offer, the proposal must be certain as to the object, the price and other essential terms
of the contract (Art. 1319, Civil Code).

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

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

xxx xxx xxx

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

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

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

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

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

and on cross-examination:

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

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

We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties. 9

Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of distinct
consideration indispensable in an option contract, has no application, respondent appellate court also addressed the claim
of Carmelo and Equatorial that assuming arguendo that the option is valid and effective, it is impossible of performance
because it covered only the leased premises and not the entire Claro M. Recto property, while Carmelo's offer to sell
pertained to the entire property in question. The Court of Appeals ruled as to this issue in this wise:

We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of Absolute
Sale between Carmelo and Equatorial covering the whole Claro M. Recto property, made reference to four titles:
TCT Nos. 17350, 118612, 60936 and 52571. Based on the information submitted by Mayfair in its appellant's
Brief (pp. 5 and 46) which has not been controverted by the appellees, and which We, therefore, take judicial
notice of the two theaters stand on the parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m
and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of land covering the
whole Recto property demonstrates the legal and physical possibility that each parcel of land, together with the
buildings and improvements thereof, could have been sold independently of the other parcels.

At the time both parties executed the contracts, they were aware of the physical and structural conditions of the
buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto property.
The peculiar language of the stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of
Lease to the acquisition of the leased areas only. Indeed, what is being contemplated by the questioned
stipulation is a departure from the customary situation wherein the buildings and improvements are included in
and form part of the sale of the subjacent land. Although this situation is not common, especially considering the
non-condominium nature of the buildings, the sale would be valid and capable of being performed. A sale limited
to the leased premises only, if hypothetically assumed, would have brought into operation the provisions of co-
ownership under which Mayfair would have become the exclusive owner of the leased premises and at the same
time a co-owner with Carmelo of the subjacent land in proportion to Mayfair's interest over the premises sold to
it.
10
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of respondent
Court of Appeals on the basis of the following assigned errors:

THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE
CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE COURT
OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY
PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR
STIPULATION OF FACTS.

II

WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN DIRECTING
EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO
EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE
CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.

III

THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS

DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT
EVEN PRAYED FOR IN THE COMPLAINT.

IV

THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED
CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA, TO
RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS
OF THE CASE IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court of
Appeals. Suffice it to say that in our Resolution, dated December 9, 1992, we already took note of this matter and set out
12

the proper applicable procedure to be the following:

On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a letter-complaint to
this Court alleging certain irregularities and infractions committed by certain lawyers, and Justices of the Court of
Appeals and of this Court in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes
of the nature of an administrative complaint for misconduct against members of the judiciary. While the letter-
complaint arose as an incident in case CA-G.R. CV No. 32918 (now G.R. No. 106063), the disposition thereof
should be separate and independent from Case G.R. No. 106063. However, for purposes of receiving the
requisite pleadings necessary in disposing of the administrative complaint, this Division shall continue to have
control of the case. Upon completion thereof, the same shall be referred to the Court En Banc for proper
disposition.13

This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and Equatorial, to be an
independent and separate subject for an administrative complaint based on misconduct by the lawyers and justices
implicated therein, it is the correct, prudent and consistent course of action not to pre-empt the administrative proceedings
to be undertaken respecting the said irregularities. Certainly, a discussion thereupon by us in this case would entail a
finding on the merits as to the real nature of the questioned procedures and the true intentions and motives of the players
therein.

In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in the two
contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial court and the Court of
Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the aftermath of
the sale by Carmelo of the entire Claro M. Recto property to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.
 In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof. 14

We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal
in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto, unequivocal was our characterization of an option contract as one
15

necessarily involving the choice granted to another for a distinct and separate consideration as to whether or not to
purchase a determinate thing at a predetermined fixed price.

It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at
the beginning of this decision, the defendant Valdes granted to the plaintiff Borck the right to purchase the
Nagtajan Hacienda belonging to Benito Legarda, during the period of three months and for its assessed
valuation, a grant which necessarily implied the offer or obligation on the part of the defendant Valdes to sell to
Borck the said hacienda during the period and for the price mentioned . . . There was, therefore, a meeting of
minds on the part of the one and the other, with regard to the stipulations made in the said document. But it is not
shown that there was any cause or consideration for that agreement, and this omission is a bar which precludes
our holding that the stipulations contained in Exhibit E is a contract of option, for, . . . there can be no contract
without the requisite, among others, of the cause for the obligation to be established.

In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:

A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires

the privilege of buying from, or selling to B, certain securities or properties within a limited time
at a specified price. (Story vs. Salamon, 71 N.Y., 420.)

From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24 Pac., 695; 10
Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:

An agreement in writing to give a person the option to purchase lands within a given time at a
named price is neither a sale nor an agreement to sell. It is simply a contract by which the
owner of property agrees with another person that he shall have the right to buy his property at
a fixed price within a certain time. He does not sell his land; he does not then agree to sell it;
but he does sell something; that is, the right or privilege to buy at the election or option of the
other party. The second party gets in praesenti, not lands, nor an agreement that he shall have
lands, but he does get something of value; that is, the right to call for and receive lands if he
elects. The owner parts with his right to sell his lands, except to the second party, for a limited
period. The second party receives this right, or, rather, from his point of view, he receives the
right to elect to buy.

But the two definitions above cited refer to the contract of option, or, what amounts to the same thing, to the case
where there was cause or consideration for the obligation, the subject of the agreement made by the parties;
while in the case at bar there was no such cause or consideration. (Emphasis ours.)
16

The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be
valid and enforceable, must, among other things, indicate the definite price at which the person granting the option, is
willing to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square meter upon
failure to make the purchase within the time specified; in one other case we freed the landowner from her promise to sell her land
17

if the prospective buyer could raise P4,500.00 in three weeks because such option was not supported by a distinct
consideration; in the same vein in yet one other case, we also invalidated an instrument entitled, "Option to Purchase" a parcel of
18

land for the sum of P1,510.00 because of lack of consideration; and as an exception to the doctrine enumerated in the two
19

preceding cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as stipulated in the lease
contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the
consideration for that of the other. In all these cases, the selling price of the object thereof is always predetermined and specified
20

in the option clause in the contract or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu
Asuncion vs. Court of Appeals that:
21

. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is
perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil
Code provides:
 Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of
the thing sold in retained until the fulfillment of a positive suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory
force. . . .

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed,
can be obligatory on the parties, and compliance therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract
of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of
the Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promisor if the promise is supported by a consideration distinct from the price.
(1451a).

Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their
respective undertakings.

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely
an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make
offers or only as proposals. These relations, until a contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules
generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right
to withdraw the offer before its acceptance, or if an acceptance has been made, before the offeror's coming to
know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins,
Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art.
1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319,
Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368).
The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which ordains that "every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and
good faith."

(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would be a breach
of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract
by itself; and it is to be distinguished from the projected main agreement (subject matter of the option) which is
obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise
of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract
("object" of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however,
renders himself liable for damages for breach of the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two lease contracts
involved in the instant case, we so hold that no option to purchase in contemplation of the second paragraph of Article
1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair and is not
an option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the option, has
no applicability in the instant case.
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would bring them
into the ambit of the usual offer or option requiring an independent consideration.

An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate
and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported
by consideration. In the instant case, the right of first refusal is an integral part of the contracts of lease. The consideration
22

is built into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by Article 1324 on
withdrawal of the offer or Article 1479 on promise to buy and sell would render in effectual or "inutile" the provisions on
right of first refusal so commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that
Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which wanted to be assured that it shall
be given the first crack or the first option to buy the property at the price which Carmelo is willing to accept. It is not also
correct to say that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of the
entire contract of lease. The consideration for the lease includes the consideration for the right of first refusal. Thus,
Mayfair is in effect stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also
consents that, should it sell the leased property, then, Mayfair shall be given the right to match the offered purchase price
and to buy the property at that price. As stated in Vda. De Quirino vs. Palarca, in reciprocal contract, the obligation or
23

promise of each party is the consideration for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8 to be that of a
contractual grant of the right of first refusal to Mayfair.

We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial.

The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu Asuncion vs. Court
of Appeals. 24

First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of first
refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this right of Mayfair, for
it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters evidencing the offer
and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its logical end. While it initially
recognized Mayfair's right of first refusal, Carmelo violated such right when without affording its negotiations with Mayfair
the full process to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the "30-
day exclusive option" time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some time, and then
sold, without prior notice to Mayfair, the entire Claro M Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree
with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts
because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a
purchaser in good faith, and, therefore, rescission lies.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors.
The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under
the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means
of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury and damage the
contract may cause, or to protect some incompatible and preferent right created by the contract. Rescission
implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action
for its rescission where it is shown that such third person is in lawful possession of the subject of the contract and
that he did not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is
not considered a third party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be
deemed a purchaser in good faith for the record shows that it categorically admitted it was aware of the lease in
favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although
 the Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso
and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to and
indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that some other
person has a right to or interest in such property and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in the property. Good faith
connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to
determine if it involved stipulations that would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease. Assuming
this to be true, we nevertheless agree with the observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par.
20 on priority right given to the Bonnevies, it had only itself to blame. Having known that the
property it was buying was under lease, it behooved it as a prudent person to have required
Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is contained. 25

Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It was
petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness dictate that
instead of nullifying the agreement on that basis, the stipulation should be given effect by including the indivisible
appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the
ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of being
nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the participation of the owner
in the attempt to strip Mayfair of its rights, the right of first refusal should include not only the property specified in the
contracts of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible.
Carmelo acted in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear violation of
Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-offers between the
parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate within the 30-day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be authorized to
exercise its right of first refusal under the contract to include the entirety of the indivisible property. The boundaries of the
property sold should be the boundaries of the offer under the right of first refusal. As to the remedy to enforce Mayfair's
right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice Vitug. The
doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not amplified under the peculiar facts
of this case.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it
was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the
Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's
knowledge of the stipulations therein should have cautioned it to look further into the agreement to determine if it involved
stipulations that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or rescinded. All
of these matters are now before us and so there should be no piecemeal determination of this case and leave festering
sores to deteriorate into endless litigation. The facts of the case and considerations of justice and equity require that we
order rescission here and now. Rescission is a relief allowed for the protection of one of the contracting parties and even
third persons from all injury and damage the contract may cause or to protect some incompatible and preferred right by
the contract. The sale of the subject real property by Carmelo to Equatorial should now be rescinded considering that
26

Mayfair, which had substantial interest over the subject property, was prejudiced by the sale of the subject property to
Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be
included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair could have
purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The damages which
Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow Mayfair to
exercise its right of first refusal at the price which it was entitled to accept or reject which is P11,300,000.00. This is clear
from the records.

To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of the
disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its right. It
is not proper to give it an empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a fish if it
would accept the choice of being thrown back into the river. Why should Carmelo be rewarded for and allowed to profit
from, its wrongdoing? Prices of real estate have skyrocketed. After having sold the property for P11,300,000.00, why
should it be given another chance to sell it at an increased price?
 Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a
contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on
contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying and
selling of the real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied in a
contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the
law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy encourages
multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to the property
under the right of the first refusal according to the terms at which they should have been offered then to Mayfair, at the
price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous
nor is it merely preparatory. Paragraphs 8 of the two leases can be executed according to their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both
Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with Mayfair.
It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge of the sale coming to the
attention of Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance with the agreement
of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge
that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious
advantage of Mayfair.

Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of interests.
The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used
the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has
received rents and otherwise profited from the use of the property turned over to it by Carmelo. In fact, during all the years
that this controversy was being litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase
the property. Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial.

WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV No.
32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo & Bauermann is ordered to return to
petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and documents
necessary to return ownership to Carmelo and Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow
Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00.

SO ORDERED.

SPOUSES HEINZRICH THEIS AND BETTY THEIS, petitioners,

vs.
HONORABLE COURT OF APPEALS, HONORABLE ELEUTERIO GUERRERO, ACTING PRESIDING JUDGE, BRANCH XVIII,
REGIONAL TRIAL COURT, TAGAYTAY CITY, CALSONS DEVELOPMENT CORPORATION, respondents.

HERMOSISIMA, JR., J.:

In the instant petition, we shall have the occasion to apply the concept of mistake in the annulment of contracts.

Private respondent Calsons Development Corporation is the owner of three (3) adjacent parcels of land covered by Transfer
Certificate of Title (TCT) Nos. 15515 (parcel no. 1 in the location map), 15516 (parcel no. 2) and 15684 (parcel no. 3), with the area
of 1,000 square meters, 226 square meters and 1,000 square meters, respectively. All three parcels of land are situated along
Ligaya Drive, Barangay Francisco, Tagaytay City. Adjacent to parcel no. 3, which is the lot covered by TCT No. 15684, is a vacant
lot denominated as parcel no. 4.

In 1985, private respondent constructed a two-storey house on parcel no. 3. The lots covered by TCT No. 15515 and TCT No.
15516, which are parcel no. 1 and parcel no. 2, respectively, remained idle.

However, in a survey conducted in 1985, parcel no. 3, where the two-storey house stands, was erroneously indicated to be covered
not by TCT No. 15684 but by TCT No. 15515, while the two idle lands (parcel nos. 1 and 2) were mistakenly surveyed to be located
on parcel no. 4 instead (which was not owned by private respondent) and covered by TCT Nos. 15516 and 15684.

On October 26, 1987, unaware of the mistake by which private respondent appeared to be the owner of parcel no. 4 as indicated in
the erroneous survey, and based on the erroneous information given by the surveyor that parcel no. 4 is covered by TCT No.
15516 and 15684, private respondent, through its authorized representative, one Atty. Tarcisio S. Calilung, sold said parcel no. 4 to
petitioners.

Upon execution of the Deed of Sale, private respondent delivered TCT Nos. 15516 and 15684 to petitioners who, on October 28,
1987, immediately registered the same with the Registry of Deeds of Tagaytay City. Thus, TCT Nos. 17041 and 17042 in the
names of the petitioners were issued.

Indicated on the Deed of Sale as purchase price was the amount of P130,000.00. The actual price agreed upon and paid, however,
was P486,000.00. This amount was not immediately paid to private respondent; rather, it was deposited in escrow in an interest-
bearing account in its favor with the United Coconut Planters Bank in Makati City. The P486,000.00 in escrow was released to, and
received by, private respondent on December 4, 1987.

Thereafter, petitioners did not immediately occupy and take possession of the two (2) idle parcels of land purchased from private
respondent. Instead, petitioners went to Germany.

In the early part of 1990, petitioners returned to the Philippines. When, they went to Tagaytay to look over the vacant lots and to
plan the construction of their house thereon, they discovered that parcel no. 4 was owned by another person. They also discovered
that the lots actually sold to them were parcel nos. 2 and 3 covered by TCT Nos. 15516 and 15684. respectively. Parcel no. 3,
however, could not have been sold to the petitioners by the private respondents as a two-storey house, the construction cost of
which far exceeded the price paid by the petitioners, had already been built thereon even prior to the execution of the contract
between the disputing parties.

Petitioners insisted that they wanted parcel no. 4, which is the idle lot adjacent to parcel no. 3, and persisted in claiming that it was
parcel no. 4 that private respondent sold to them. However, private respondent could not have possibly sold the same to them for it
did not own parcel no. 4 in the first place.

The mistake in the identity of the lots is traceable to the erroneous survey conducted in 1985.

To remedy the mistake, private respondent offered parcel nos. 1 and 2 covered by TCT Nos. 15515 and 15516, respectively, as
these two were precisely the two vacant lots which private respondent owned and intended to sell when it entered into the
transaction with petitioners. Petitioners adamantly rejected the good faith offer. They refused to yield to reason and insisted on
taking parcel no. 3, covered by TCT No. 155864 and upon which a two-storey house stands, in addition to parcel no. 2, covered by
TCT No. 15516, on the ground that these TCTs have already been cancelled and new ones issued in their name.

Such refusal of petitioners prompted private respondent to make another offer, this time, the return of an amount double the price
paid by petitioners. Petitioners still refused and stubbornly insisted in their stand.

Private respondent was then compelled to file an action for annulment of deed of sale and reconveyance of the properties subject
thereof in the Regional Trial Court.
1 2

The trial court rendered judgment in favor of private respondent. Identifying the core issue in the instant controversy to be the
voidability of the contract of sale between petitioners and private respondent on the ground of mistake, the trial court annulled said
contract of sale after finding that there was indeed a mistake in the identification of the parcels of land intended to be the subject
matter of said sale. The trial court ratiocinated:

Meeting head-on the issue of alleged mistake in the object of the same, defendants in their answer averred that
they relied on the technical descriptions of TCT Nos. 15516 and 15684 appearing in the deed of sale.
...

A resolution of the conflicting claims of the parties to the instant controversy calls for an inquiry on their real intent
relative to the identity of the parcels which plaintiff intended to sell to defendants and which the latter in turn,
intended to buy from the former. For, the Court cannot ignore the dictates of logic and common sense which,
ordinarily, could not push a person to sell to another, a property which the former does not own in the first place,
for fear of adverse consequences. The vendee, following the same reasoning, would not buy a thing unless he is
totally certain that the seller is the real owner of the thing offered for sale. It is equally true that when one sells or
buys a real property, he either sells or buys the property as he sees it, in its actual setting and by its physical
metes and bounds, and not be the mere lot number assigned to the same property in the certificate of title or in
any document. And, when a buyer of real property decides to purchase from his seller, he is ordinarily bound by
prudence to ascertain the true nature, identity or character of the property that he intends to buy and ascertain
the title of his vendor before he parts with his money. It is quite obvious that the foregoing precepts and
precautions were observed by the parties in the case at bar as there is no question at all that he sale in question
was consummated through the initiative of Mrs. Gloria Contreras and then Vice-Mayor Benjamin Erni . . . both
brokers of the sale who, after a chance meeting with defendants at the Taal Vista Lodge Hotel prior to the sale of
plaintiffs parcels, brought defendants to the vicinity where plaintiffs three (3) adjacent parcels of land are located
and pointed to defendants the two (2) vacant parcels right beside plaintiffs house. It is also undisputed that when
defendants intimated to the brokers their desire to buy the vacant lots pointed to them when they visited the same
 place, they were brought to plaintiffs representative, Tarcisio S. Calilung, at the latter's office in Makati where the
parties discussed the terms of the sale.

The Court notes further from the records that defendants' desire to buy vacant lots from plaintiff is not only
confirmed by the testimony of Gloria Contreras and the ocular inspection conducted by the court but by
defendant Betty Theis herself when the latter testified as follows:

"COURT:

Q. Why, what was the lot that you intended to buy?

A. The right side of the house, Your Honor." (TSN of November 8, 1991, page 19)

Similarly, in answer to a question propounded to the same defendant by their counsel, she stated that —

"ATTY. ROSALES:

Q. In other words, the titles delivered to you were not the titles covering the right side of the
house?

A No, sir." (Ibid., page 20)

It is relevant to mention that when the defendants attempted to take possession of the parcels of land they
bought from the plaintiff on which they intended to construct their house after their return from a foreign sojourn,
they admittedly wanted to take that vacant area, which as herein shown, turns out to be a property not owned by
plaintiff. From this act of the defendants, a clear meaning is shown. Defendants themselves, knew right from the
beginning that what they intended to buy was that vacant lot, not the lot where plaintiffs house stands, covered by
TCT No. 15684 which was wrongly mentioned as one of the objects of the sale. . . .

The fact that the Deed of Sale subsequently executed by plaintiff and the defendants on October 27, 1987 covers
the parcel of land where plaintiffs two- storey house was constructed will clearly reflect a situation that is totally
different from what defendants had intended to buy from the plaintiff viz-a-viz [sic] the latter's intention to sell its
two (2) vacant lots to defendants. Notwithstanding defendants' claim that it was not possible for plaintiffs
representative not to be familiar with its properties, the acts and circumstances established in this case would
clearly show, and this Court is convinced, that the inclusion of the parcel where plaintiffs house is constructed is
solely attributable to a mistake in the object of the sale between the parties. This mistake, obviously, was made,
on the part of plaintiffs representative when the latter mistook the vacant lot situated on the right side of plaintiffs
house as its vacant parcels of land when its vacant lots are actually situated on the left side of the same house.
Indeed, such mistake on plaintiffs part appears to be tragic as it turned out later that the vacant lot on the right
side of plaintiffs house did not belong to plaintiff. Worse, is the fact that what was conveyed to defendants under
the deed of sale was the parcel where plaintiff s house already stood at the time of the sale. This, definitely, is not
what the parties intended.

. . . Going by the facts established by defendants' evidence, it is clear that defendants did not intend to buy the
parcel of land where plaintiffs house stood as defendant Betty Theis declared in her testimony that they wanted
to buy the parcel at the right side of plaintiffs house where she and her husband would construct their house
(TSN of June 4 1991, page 56). Neither can this Court accept the hypothesis that plaintiff intended to sell that
parcel where its house was already constructed for if this was its true intention. it would not sell its two (2) lots at
the price of P486,000.00 which is way below the costs of its construction of P1,500,000.00.

The law itself explicitly recognizes that consent of the parties is one of the essential elements to the validity of the
contract and where consent is given through mistake, the validity of the contractual relations between the parties
is legally impaired.

As earlier stated, the facts obtaining in the case at bar undoubtedly show that when defendants bought the
properties of plaintiff, they intended to buy the vacant lots owned by the latter. As the sale that was finally
consummated by the parties had covered the parcel where plaintiffs house was constructed even before the sale
took place, this Court can safely assume that the deed of sale executed by the parties did not truly express their
true intention. In other words, the mistake or error on the subject of the sale in question appears to be substantial
as the object of the same transaction is different from that intended by the parties. This fiasco could have been
cured and the pain and travails of this litigation avoided,had parties agreed to a reformation of the deed of
sale. But. as shown by the sequence of events occurring after the sale was consummated. and the mistake was
discovered. the defendants refused, insisting that they wanted the vacant lots on the right side of plaintiffs house.
which was impossible the vacant lots on the right side for plaintiff to do, as said vacant lots were not of its own
dominion. [Emphasis ours]
3
Aggrieved by the decision of the trial court, petitioners sought its
reversal from respondent Court of Appeals . Respondent court, however, did not find the appeal meritorious and accordingly
4 5

affirmed the trial court decision. Ruled the respondent appellate court:
6

There is no doubt that when defendants-appellants attempted to take physical possession of Parcel No. 4 in May,
1990, they were prevented by the true owner thereof from taking possession of said land. To clear the matter,
plaintiff-appellee hired a new surveyor who revealed in his survey that Parcel No. 4 is not included in plaintiff-
appellee's Transfer Certificates of Title from which said plaintiff-appellee mistakenly offered defendants-
appellants said Parcel No. 4. Realizing its mistake, plaintiff- appellee offered defendants-appellants Parcels Nos.
1 and 2 under the same Transfer Certificates of Title or the reimbursement of the purchase price in double
amount. But defendants-appellants insisted this time to acquire Parcel No. 3 wherein plaintiff-appellee had
already a house, and was not the object of the sale.

Said Parcel No. 3 cannot be the object of the sale between the parties as plaintiff-appellee's house already
stands in the said area even before defendants-appellants had chosen Parcel No. 4 which was described to be
on the right side of said plaintiff-appellee's house in Parcel No. 3. There is no dispute that defendants-appellants
wanted to buy Parcel No. 4 as testified to by defendant-appellant Petty Theis, herself (p. 19, tsn, Nov. 8, 1991),
which lot turned out to be outside of the Transfer Certificates of Title of plaintiff-appellee. Defendants-appellants
cannot now insist on Parcel No. 3 as the same was not the object of the sale between the parties.

Clearly, therefore. there was honest mistake on the part of Plaintiff- appellee in the sale of Parcel No. 4 to
defendants-appellants which plaintiff- appellee tried to remedy by offering defendants-appellant instead his
Parcels Nos. 1 or 2, or reimbursement of the purchase price in double amount. [Emphasis ours]
7

We find that respondent court correctly affirmed the findings and conclusions of the trial court in annulling the deed of sale as the
former are supported by evidence and the latter are in accordance with existing law and jurisprudence.

Art. 1390 of the New Civil Code provides:

Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to
the contracting parties:

(1) . . .

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence, or fraud.

xxx xxx xxx

In the case at bar, the private respondent obviously committed an honest mistake in selling parcel no. 4. As correctly noted by the
Court of Appeals, it is quite impossible for said private respondent to sell the lot in question as the same is not owned by it. The
good faith of the private respondent is evident in the fact that when the mistake was discovered, it immediately offered two other
vacant lots to the petitioners or to reimburse them with twice the amount paid. That petitioners refused either option left the private
respondent with no other choice but to file an action for the annulment of the deed of sale on the ground of mistake. As enunciated
in the case of Mariano vs. Court of Appeals: 8

A contract may be annulled where the consent of one of the contracting parties was procured by mistake, fraud,
intimidation, violence, or undue influence.

Art. 1331 of the New Civil Code provides for the situations whereby mistake may invalidate consent. It states:

Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have principally moved one or both parties to enter into the
contract.

Tolentino explains that the concept of error in this article must include both ignorance, which is the absence of knowledge with
9

respect to a thing, and mistake properly speaking, which is a wrong conception about said thing, or a belief in the existence of
some circumstance, fact, or event, which in reality does not exist. In both cases, there is a lack of full and correct knowledge about
the thing. The mistake committed by the private respondent in selling parcel no. 4 to the petitioners falls within the second type.
Verily, such mistake invalidated its consent and as such, annulment of the deed of sale is proper.

The petitioners cannot be justified in their insistence that parcel no. 3, upon which private respondent constructed a two-storey
house, be given to them in lieu of parcel no. 4. The cost of construction in 1985 for the said house (P1,500,000.00) far exceeds the
amount paid by the petitioners to the private respondent (P486,000.00). Moreover, the trial court, in questioning private
respondent's witness, Atty. Tarciso Calilung (who is also its authorized representative) clarified that parcel no. 4, the lot mistakenly
sold, was a vacant lot: 10
 COURT: What property did you point to them?

A. I pointed to parcel No. 4, as appearing in the sketch.

COURT: Parcel No. 4 is a vacant lot?

A. Yes, your Honor.

COURT: So, there was no house on that lot?

A. There was no house. There were pineapple crops existing on the property.

COURT: So, you are telling the Court that the intended lot is vacant lot or Parcel 4?

A. Yes, your Honor.

Thus, to allow the petitioners to take parcel no. 3 would be to countenance unjust enrichment. Considering that petitioners intended
at the outset to purchase a vacant lot, their refusal to accept the offer of the private respondent to give them two (2) other vacant
lots in exchange, as well as their insistence on parcel no. 3, which is a house and lot, is manifestly unreasonable. As held by this
Court in the case of Security Bank and Trust Company v. Court of Appeals : 11

Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost
would undoubtedly constitute unjust enrichment for the bank to the prejudice of the private respondent. Such
unjust enrichment, as previously discussed, is not allowed by law.

WHEREFORE, the petition is hereby DISMISSED and the decision of the Court Appeals in CA-G.R. 47000 dated May 31, 1996
AFFIRMED. Costs against the petitioner.

SO ORDERED.

ISABEL RUBIO ALCASID, assisted by her husband DOMINGO A. ALCASID, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and RUFINA L. LIM, respondents.

Arnold V. Guerrero & Associates for petitioner.

Nelson A. Loyola and Danilo T. Arrienda for private respondent.

QUIASON, J.:

This is a petition under Rule 45 of the Revised Rules of Court to set aside the decision of the Court of Appeals in CA-G.R. SP No.
26108 entitled "Rufina L. Lim v. Hon. Eustaquio Sto. Domingo, in his capacity as Presiding Judge of the Regional Trial Court,
Fourth Judicial Region, Branch 35, Calamba, Laguna, and Isabel Rubio Alcasid, assisted by her husband Domingo A. Alcasid."

Petitioner is one of the co-owners of two parcels of land located in Calamba, Laguna. Private respondent offered to purchase from
petitioner and her co-owners the abovementioned property. Petitioner was willing to sell her share for P4,500,000.00 and only if all
her co-owners would sell their respective shares of the said land.

Petitioner engaged the services of Atty. Antonio A. Fernandez for the purpose of negotiating the sale, without knowing that he was
also representing private respondent.

In March 1990, Atty. Fernandez confirmed to petitioner that all her

co-owners were already amenable to sell their shares for P1,500,000.00.

On March 4, 1990, petitioner signed a Deed of Sale drafted by

Atty. Fernandez. Subsequently, petitioner learned that the other co-owners did not agree to sell their shares over the subject
property.
On November 4, 1990, petitioner filed a complaint in the Regional Trial Court, Branch 34, Calamba, Laguna, for annulment of the
contract of sale and damages with a prayer for temporary restraining order or writ of preliminary injunction against private
respondent.

Private respondent filed a motion to dismiss on the grounds that the complaint stated no cause of action. The trial court denied the
motion to dismiss.

On August 20, 1991, a motion to declare private respondent in default was filed by petitioner. This was granted by the trial court.

Private respondent appealed the said orders of the trial court to the Court of Appeals, which reversed the decision of the trial court
and held that the complaint stated no cause of action.

Hence, this petition.

II

Petitioner alleges that her complaint for annulment of contract is based upon fraud, mistake and undue influence which vitiated her
consent. According to her, were it not for the misrepresentation of private respondent and
Atty. Fernandez that her co-owners had agreed to sell their share to private respondent, petitioner would not have agreed to sell
her share.

Private respondent, on the other hand, claims the complaint is in the nature of malpractice suit against Atty. Fernandez and not
against her.

III

Petitioner contends that she was not aware that Atty. Fernandez was also representing private respondent, but a letter dated March
4, 1990 sent by
Atty. Fernandez to the petitioner belied her allegation.

The letter is reproduced in full, as follows:

March 4, 1990

TO: Mrs. Isabel R. Alcasid &

Mrs. Mila A. Marcos (daughter)

For and in behalf of my client, Miss Rufina L. Lim of Bucal, Calamba, Laguna, I, Atty. Antonio A. Fernandez
hereby confirm that the selling price of One Million One Thousand Seven Hundred Fifty
Pesos (P1,0001,750.00) is NET Purchase price and full payment of Lot Nos. 44-10-A-4 & 199 New-A-4.

My client, Miss Rufina Lim, the vendee, hereby assumes the full payment of BIR capital gain tax and transfer fee.
Likewise, my said clients shall shoulder Register of Deed's registration and transfer fees, including all the
documentary & science stamps. Attorney's fees and back taxes and other related fees shall be exclusively paid
by the vendee, Miss Lim.

In payment for the said purchase price, the full amount is represented by PNB DEMAND DRAFT NO. ________
issued on
March ___, 1990.

This arrangement is also true to other vendors, namely Ignacio Rubio, Felix Rubio, Heirs of Eufrosina Laygo,
Heirs of Luz Rubio & Heirs of Amador Rubio.

ANTONIO A. FERNANDEZ
Counsel for Miss Rufina Lim

(Rollo, p. 7; Emphasis supplied)

On the matter of fraud, Article 1338 of the Civil Code of the Philippines provides:

There is fraud when, through insidious words or machinations of one of the contracting parties the other is
induced to enter into a contract which, without them, he would not have agreed to (Art. 1338, Civil Code).

In order that fraud may vitiate consent and be a cause for annulment of contract, the following must concur:
 1.) It must have been employed by one contracting party upon the other (Art. 1342 and 1344);

2.) It must have induced the other party to enter into the contract (Art. 1338);

3.) It must have been serious (Art. 1344);

4.) It must have resulted in damage and injury to the party seeking annulment (Tolentino, IV Commentaries on
the Civil Code of the Philippines, 507 [1991 ed]).

As to the alleged mistake, Article 1331 of the Civil Code of the Philippines provides:

In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of
the contract, or to those conditions which have principally moved one or both parties to enter into the contract.

To invalidate consent, the error must be real and not one that could have been avoided by the party alleging it. The error must arise
from facts unknown to him. He cannot allege an error which refers to a fact known to him or which he should have known by
ordinary diligent examination of the facts. An error so patent and obvious that nobody could have made it, or one which could have
been avoided by ordinary prudence, cannot be invoked by the one who made it in order to annul his contract (Tolentino, supra at
pp. 486-487).

Petitioner could have avoided the alleged mistake had she exerted efforts to verify from her co-owners if they really consented to
sell their respective shares.

As to undue influence, Article 1337 of the Civil Code of the Philippines provides:

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental weakness or was ignorant or in financial distress.

Undue influence, therefore, is any means employed upon a party which, under the circumstances, he could not well resist and
which controlled his volition and induced him to give his consent to the contract, which otherwise he would not have entered into. It
must in some measure destroy the free agency of a party and interfere with the exercise of that independent discretion which is
necessary for determining the advantages or disadvantages of a proposed contract (Tolentino, supra at p. 501). If a competent
person has once assented to a contract freely and fairly, he is bound thereby.

The finding of the Court of Appeals that petitioner executed the contract of her own free will and choice and not from duress is fully
supported by the evidence. Such finding should not be disturbed (Martinez v. Hongkong & Shanghai Bank, 15 Phil. 252 [1910]).

Private respondent did not commit any wrongful act or omission which violated the primary right of petitioner. Hence, petitioner did
not have a cause of action (State Investment House, Inc. v. Court of Appeals, 206 SCRA 348 [1992]).

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals appealed from is AFFIRMED.

SO ORDERED.

DEVELOPMENT BANK OF THE PHILIPPINES1 and PRIVATIZATION AND MANAGEMENT OFFICE (formerly ASSET
PRIVATIZATION TRUST), Petitioners,
vs.
HON. COURT OF APPEALS, PHILIPPINE UNITED FOUNDRY AND MACHINERY CORP. and PHILIPPINE IRON
MANUFACTURING CO., INC., Respondents.

DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court of the decision of the Court of Appeals (CA) dated May
7, 1999 in CA-G.R. CV No. 49239 entitled "Philippine United Foundry and Machinery Corp. and Philippine Iron Manufacturing Co.,
Inc. v. Development Bank of the Philippines and Asset Privatization Trust" which upheld the decision of the Regional Trial Court
(RTC), Branch 98 of Quezon City in Civil Case No. Q-49650.

Sometime in March 1968, the Development Bank of the Philippines (DBP) granted to respondents Philippine United Foundry and
Machineries Corporation and Philippine Iron Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000
consisting of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan was evidenced by a promissory note 2 dated June
26, 1968 and secured by a mortgage3 executed by respondents over their present and future properties such as buildings,
permanent improvements, various machineries and equipment for manufacture.

Subsequently, DBP granted to respondents another loan in the form of a five-year revolving guarantee amounting to P1,700,000
which was reflected in the amended mortgage contract4 dated November 20, 1968. According to respondents, the loan guarantee
was extended to them when they encountered difficulty in negotiating the DBP Progress Bonds. Respondents were only able to sell
the bonds in 1972 or about five years from its issuance for an amount that was 25% less than its face value. 5

On September 10, 1975, the outstanding accounts of respondents with DBP were restructured in view of their failure to pay. Thus,
the outstanding principal balance of the loans and advances amounting to P4,655,992.35 were consolidated into a single account.
The restructured loan was evidenced by a new promissory note 6 dated November 12, 1975 payable within seven years, with partial
payments on the principal to be made beginning on the third year plus a 12% interest per annum payable every month. The
following paragraph appears at the bottom portion of the note:

This promissory note represents the consolidation into one account of the outstanding principal balance of PHILIMCO and
PHUMACO’s account, and is prepared pursuant to Res. No. 228, dated September 10, 1975, approved by the Executive
Committee pursuant to Bd. Res. No. 3577, s. of 1975. This note is secured by mortgages on the existing assets of the firms. 7

On the other hand, all accrued interest and charges due amounting to P3,074,672.21 were denominated as "Notes Taken for
Interests" and evidenced by a separate promissory note 8 dated November 12, 1975. The following annotation appears at the
bottom portion of the note:

This promissory note represents all accrued interests and charges which are taken up as "NOTES TAKEN FOR INTEREST" due
on the accounts of PHILIMCO and PHUMACO approved under Bd. Res. No. 3577, s. of 1975. This note is secured by (a) mortgage
on the existing assets of the firm.9

Both notes provided for the following additional charges and penalties:

(1) 12% interest per annum on unpaid amortizations 10 ;

(2) 10% penalty charge per annum on the total amortizations past due effective 30 days from the date respondents failed
to comply with any of the terms stipulated in the notes11 ; and,

(3) Bank advances for insurance premiums, taxes, rentals, litigation and acquired assets expenses, collection and other
out-of-pocket expenses not covered by inspection and processing fees subject to the following charges 12 :

(a) One time service charge of ½% on the amount advanced to be included in the receivable account;

(b) Penalty charge of 8% per annum on past due advances; and

(c) Interest at 12% per annum.

Notwithstanding the restructuring, respondents were still unable to comply with the terms and conditions of the new promissory
notes. As a result, respondents requested DBP to refinance the matured obligation. The request was granted by DBP, pursuant to
which three foreign currency denominated loans sourced from DBP’s own foreign borrowings were extended to respondents on
various dates between 1980 and 1981.13 These loans were secured by mortgages14 on the properties of respondents and were
evidenced by the following promissory notes:

Face Value Maturity Date Interest Rate Per Annum

(1) Promissory Note15 $661,330 December 15, 1990 3% over DBP’s borrowing rate16
dated December 11, 1980

(2) Promissory Note17 $666,666 June 23, 1991 3% over DBP’s borrowing rate18
dated June 5, 1981

(3) Promissory Note19 $486,472.37 December 31, 1982 4% over DBP’s borrowing cost
dated December 16, 1981

Apart from the interest, the promissory notes imposed additional charges and penalties if respondents defaulted on their payments.
The notes dated December 11, 1980 and June 5, 1981 specifically provided for a 2% annual service fee computed on the
outstanding principal balance of the loans as well as the following additional interest and penalty charges on the loan amortizations
or portions in arrears:

(a) If in arrears for thirty (30) days or less:

 i. Additional interest at the basic loan interest rate per annum computed on total amortizations past due,
irrespective of age.

ii. No penalty charge

(b) If in arrears for more than thirty (30) days:

i. Additional interest at the basic loan interest rate per annum computed on total amortizations past due,
irrespective of age, plus,

ii. Penalty charge of 16% per annum computed on amortizations or portions thereof in arrears for more than thirty
(30) days counted from the date the amount in arrears becomes liable to this charge.20

Under these two notes, respondents also bound themselves to pay bank advances for insurance premiums, taxes, litigation and
acquired assets expenses and other out-of-pocket expenses not covered by inspection and processing fees as follows:

(a) One-time service charge of 2% of the amount advanced, same to be included in the receivable account.

(b) Interest at 16% per annum.

(c) Penalty charge from date of advance at 16% per annum.

The note dated December 16, 1981, on the other hand, provided for the interest and penalty charges on loan amortizations or
portions of it in arrears as follows:

(a) Additional interest at the basic loan interest per annum computed on total amortizations past due irrespective of age;
plus

(b) Penalty charges of 8% per annum computed on total amortizations in arrears, irrespective of age. 21

Respondents were likewise bound to pay bank advances for insurance premiums, taxes, litigation and acquired assets expenses
and other out-of-pocket expenses not covered by inspection and processing fees as follows:

(a) One-time service charge of 2% of (the) amount advanced, same to be included and debited to the advances account;

(b) Interest at the basic loan interest rate; and

(c) Penalty charge from date of advance at 8% per annum.22

Sometime in October 1985, DBP initiated foreclosure proceedings upon its computation that respondents’ loans were in arrears
by P62,954,473.68.23 According to DBP, this figure already took into account the intermittent payments made by respondents
between 1968 and 1981 in the aggregate amount of P5,150,827.71.24

However, the foreclosure proceedings were suspended on twelve separate occasions from October 1985 to December 1986 upon
the representations of respondents that a financial rehabilitation fund arising from a contract with the military was forthcoming. On
December 23, 1986, before DBP could proceed with the foreclosure proceedings, respondents instituted the present suit for
injunction.

On January 6, 1987, the complaint was amended to include the annulment of mortgage. On December 15, 1987, the complaint was
amended a second time to implead the Asset Privatization Trust (APT) (now the Privatization and Management Office [PMO]) 25 as a
party defendant.

Respondents’ cause of action arose from their claim that DBP was collecting from them an unconscionable if not unlawful or
usurious obligation of P62,954,473.68 as of September 30, 1985, out of a mere P6,200,000 loan. Primarily, respondents contended
that the amount claimed by DBP is erroneous since they have remitted to DBP approximately P5,300,000 to repay their original
debt. Additionally, respondents assert that since the loans were procured for the Self-Reliant Defense Posture Program of the
Armed Forces of the Philippines (AFP), the latter’s breach of its commitment to purchase military armaments and equipment from
respondents amounts to a failure of consideration that would justify the annulment of the mortgage on respondents’ properties.26

On December 24, 1986, the RTC issued a temporary restraining order. A Writ of Preliminary Injunction was subsequently issued on
May 4, 1987. After trial on the merits, the court rendered a decision in favor of respondents, 27 the dispositive portion of which reads:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered in favor of the [respondents] and against the
defendants [DBP and APT], ordering that:
 (1) The Writ of Preliminary Injunction already issued be made permanent;

(2) The [respondents] be made to pay the original loans in the aggregate amount of Six Million Two Hundred Thousand
(P6,200,000) Pesos;

(3) The [respondents’] payment in the amount of Five Million Three Hundred Thirty-Five Thousand, Eight Hundred Twenty-
seven Pesos and Seventy-one Centavos (P5,335,827.71) be applied to payment for interest and penalties; and

(4) No further interest and/or penalties on the aforementioned principal obligation of P6.2 million shall be imposed/charged
upon the [respondents] for failure of the military establishment to honor their commitment to a valid and consummated
contract with the former. Costs against the defendants.

SO ORDERED.

Both DBP and PMO appealed the decision to the CA. The CA, however, affirmed the decision of the RTC. Aggrieved, DBP filed
with the CA a motion for a reconsideration28 dated May 26, 1999, which motion has not been resolved by the CA to date. PMO, on
the other hand, sought relief directly with the Court by filing this present petition upon the following grounds:

I. THE CA DISREGARDED THE BINDING AND OBLIGATORY FORCE OF CONTRACTS WHICH IS THE LAW
BETWEEN THE PARTIES.

xxx

II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT CONTRACTS TAKE EFFECT ONLY BETWEEN THE PARTIES
AS IT LINKED RESPONDENTS’ CONTRACTS WITH THE AFP WITH RESPONDENTS’ LOANS WITH DBP.

xxx

III. THE CA ERRED IN PERMANENTLY ENJOINING THE DBP AND APT FROM FORECLOSING THE MORTGAGES
ON RESPONDENTS’ PROPERTIES THEREBY VIOLATING THE PROVISIONS OF P[RESIDENTIAL] D[ECREE NO.]
385 AND PROCLAMATION NO. 50.29

On the first issue, PMO asserts that the CA erred in declaring that the interest rate on the loans had been unilaterally increased by
DBP despite the evidence on record (consisting of promissory notes and testimonies of witnesses for DBP) showing otherwise.
PMO also claims that the CA failed to take into account the effect of the restructuring and refinancing of the loans granted by DBP
upon the request of respondents.

Anent the second issue, PMO argues that the failure of the AFP to honor its commitment to respondents should have had no
bearing on respondents’ loan obligations to DBP as DBP was not a party to their contract. Hence, PMO contends that the CA ran
afoul of the principle of relativity of contracts when it ruled that no further interest could be imposed on the loans.

Finally, PMO claims that DBP, being a government financial institution, could not be enjoined by any restraining order or injunction,
whether permanent or temporary, from proceeding with the foreclosure proceedings mandated under Section 1 of Presidential
Decree No. 385.

For their part, respondents moved for the denial of the petition in their comment dated October 27, 1999, 30 stating that (1) the
petition merely raises questions of fact and not of law; (2) PMO is engaged in forum shopping considering that the motion for
reconsideration filed by its co-defendant, DBP, against the CA decision was still pending before the appellate court; and, (3) the
petition is fatally defective because the attached certification against non-forum shopping does not conform to the requirements set
by law. After PMO filed its reply denying the foregoing allegations, the parties submitted their respective memoranda.

The petition is partly meritorious.

Prefatorily, it bears stressing that only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. This Court is not a trier of facts, its jurisdiction in such a proceeding being limited to reviewing only errors of law that
may have been committed by the lower courts. Consequently, findings of fact of the trial court and the CA are final and conclusive,
and cannot be reviewed on appeal.31 It is not the function of the Court to reexamine or reevaluate evidence, whether testimonial or
documentary, adduced by the parties in the proceedings below. 32 Nevertheless, the rule admits of certain exceptions and has, in the
past, been relaxed when the lower courts’ findings were not supported by the evidence on record or were based on a
misapprehension of facts,33 or when certain relevant and undisputed facts were manifestly overlooked that, if properly considered,
would justify a different conclusion.34

The resolution of the present controversy turns on the issue regarding the precise amount of respondents’ principal obligation under
the series of mortgages which DBP, as mortgagee-creditor, attempted to foreclose. In this case, the total amount of respondents’
indebtedness is not simply a question of fact but is a question of law, one requiring the application of legal principles for the
computation of the amount owed, and is thus a matter that can be properly brought up for the Court’s determination.35

PMO claims that the total outstanding obligation of respondents reached P62.9 Million on September 30, 1985. This amount was
purportedly the peso equivalent of the foreign-currency denominated loans granted to respondents to refinance the original loans
they procured, and is inclusive of interest, penalties and other surcharges incurred from that date as a result of respondents’ past
defaults. Respondents contend, on the other hand, that DBP grossly misstated the extent of their obligation, and insist that they
should be made liable only for the amount of P6.2 Million which they actually received from DBP.

As mentioned, the RTC ultimately sustained respondents and made permanent the writ of preliminary injunction it issued to enjoin
the foreclosure proceedings. Respondents were directed to pay only the amount of the original loans, that is, P6.2 Million, with
the P5.3 Million which they previously paid to be applied as interest and penalties. The RTC did not find respondents culpable for
defaulting on their loan obligations and passed the blame to the AFP for not fulfilling its contractual obligations to respondents.

The CA affirmed the RTC decision and agreed that DBP cannot be allowed to foreclose on the mortgage securing respondents’
loan. The CA surmised that since DBP failed to adequately explain how it arrived at P62.9 Million, the original loan amount of P6.2
Million could only have been "blatantly enlarged or erroneously computed" by DBP through the imposition of an "unconscionable
rate of interest and charges." The CA also agreed with the trial court that there was no consideration for the mortgage contracts
executed by respondents considering the proceeds from the alleged foreign currency loans were never actually received by the
latter. This view is untenable and lacks foundation.

As correctly pointed out by PMO, the original loans alluded to by respondents had been refinanced and restructured in order to
extend their maturity dates. Refinancing is an exchange of an old debt for a new debt, as by negotiating a different interest rate or
term or by repaying the existing loan with money acquired from a new loan. 36 On the other hand, restructuring, as applied to a debt,
implies not only a postponement of the maturity37 but also a modification of the essential terms of the debt (e.g., conversion of debt
into bonds or into equity,38 or a change in or amendment of collateral security) in order to make the account of the debtor current. 39

In this instance, it is important to note that DBP accommodated respondents’ request to restructure and refinance their account
twice in view of the financial difficulties the latter were experiencing. The first restructuring/refinancing was granted in 1975 while
the second one was undertaken sometime in the early 1980s. Pursuant to the restructuring schemes, respondents executed
promissory notes and mortgage contracts in favor of DBP,40 the second restructuring being evidenced by three promissory notes
dated December 11, 1980, June 5, 1981 and December 16, 1981 in the total amount of $1.8 Million. The reason respondents seek
to be excused from fulfilling their obligation under the second batch of promissory notes is that first, they allegedly had "no choice"
but to sign the documents in order to have the loan restructured 41 and thus avert the foreclosure of their properties, and second,
they never received any proceeds from the same. This reasoning cannot be sustained.

Respondents’ allegation that they had no "choice" but to sign is tantamount to saying that DBP exerted undue influence upon them.
The Court is mindful that the law grants an aggrieved party the right to obtain the annulment of a contract on account of factors
such as mistake, violence, intimidation, undue influence and fraud which vitiate consent. 42 However, the fact that the
representatives were "forced" to sign the promissory notes and mortgage contracts in order to have respondents’ original loans
restructured and to prevent the foreclosure of their properties does not amount to vitiated consent.

The financial condition of respondents may have motivated them to contract with DBP, but undue influence cannot be attributed to
DBP simply because the latter had lent money. The concept of undue influence is defined as follows:

There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other
relations between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress. 43

While respondents were purportedly financially distressed, there is no clear showing that those acting on their behalf had been
deprived of their free agency when they executed the promissory notes representing respondents’ refinanced obligations to DBP.
For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party
as to destroy the latter’s free agency, making such party express the will of another rather than its own. The alleged lingering
financial woes of a debtor per se cannot be equated with the presence of undue influence. 44

Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a threat to enforce a just or legal claim
through competent authority.45 It bears emphasis that the foreclosure of mortgaged properties in case of default in payment of a
debtor is a legal remedy given by law to a creditor. 46 In the event of default by the mortgage debtor in the performance of the
principal obligation, the mortgagee undeniably has the right to cause the sale at public auction of the mortgaged property for
payment of the proceeds to the mortgagee.47

It is likewise of no moment that respondents never physically received the proceeds of the foreign currency loans. When the loan
was refinanced and restructured, the proceeds were understandably not actually given by DBP to respondents since the
transaction was but a renewal of the first or original loan and the supposed proceeds were applied as payment for the latter.
It also bears emphasis that the second set of promissory notes executed by respondents must govern the contractual relation of the
parties for they unequivocally express the terms and conditions of the parties’ loan agreement, which are binding and conclusive
between them. Parties are free to enter into stipulations, clauses, terms and conditions they may deem convenient; that is, as long
as these are not contrary to law, morals, good customs, public order or public policy. 48 With the signatures of their duly authorized
representatives on the subject notes and mortgage contracts, the genuineness and due execution of which having been
admitted,49 respondents in effect freely and voluntarily affirmed all the concurrent rights and obligations flowing therefrom.
Accordingly, respondents are barred from claiming the contrary without transgressing the principle of estoppel and mutuality of
contracts. Contracts must bind both contracting parties; their validity or compliance cannot be left to the will of one of them.50

The significance of the promissory notes should not have been overlooked by the trial court and the CA. By completely disregarding
the promissory notes, the lower courts unilaterally modified the contractual obligations of respondents after the latter already
benefited from the extension of the maturity date on their original loans, to the damage and prejudice of PMO which steps into the
shoes of DBP as mortgagee-creditor.

At this juncture, it must be emphasized that a party to a contract cannot deny its validity after enjoying its benefits without outrage to
one’s sense of justice and fairness. Where parties have entered into a well-defined contractual relationship, it is imperative that they
should honor and adhere to their rights and obligations as stated in their contracts because obligations arising from it have the force
of law between the contracting parties and should be complied with in good faith.51

As a rule, a court in such a case has no alternative but to enforce the contractual stipulations in the manner they have been agreed
upon and written. Courts, whether trial or appellate, generally have no power to relieve parties from obligations voluntarily assumed
simply because their contract turned out to be disastrous or unwise investments. 52

Thus, respondents cannot be absolved from their loan obligations on the basis of the failure of the AFP to fulfill its commitment
under the manufacturing agreement53 entered by them allegedly upon the prompting of certain AFP and DBP officials. While it is
true that the DBP representatives appear to have been aware that the proceeds from the sale to the AFP were supposed to be
applied to the loan, the records are bereft of any proof that would show that DBP was a party to the contract itself or that DBP
would condone respondents’ credit if the contract did not materialize. Even assuming that the AFP defaulted in its obligations under
the manufacturing agreement, respondents’ cause of action lies with the AFP, and not with DBP or PMO. The loan contract of
respondents is separate and distinct from their manufacturing agreement with the AFP.

Incidentally, the CA sustained the validity of a loan obligation but annulled the mortgage securing it on the ground of failure of
consideration. This is erroneous. A mortgage is a mere accessory contract and its validity would depend on the validity of the loan
secured by it.54 Hence, the consideration of the mortgage contract is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract. 55 The debtor cannot escape the consequences of the mortgage
contract once the validity of the loan is upheld.

Again, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they consented to the
same freely and voluntarily.56 Thus, respondents cannot now protest against the fact that the loans were denominated in foreign
currency and were to be paid in its peso equivalent after they had already given their consent to such terms. 57 There is no legal
impediment to having obligations or transactions paid in a foreign currency as long as the parties agree to such an arrangement. In
fact, obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of
payment.58 For this reason, it was improper for the CA to reject outright DBP’s claim that the conversion of the remaining balance of
the foreign currency loans into peso accounted for the considerable differential in the total indebtedness of respondents mainly
because the exchange rates at the time of demand had been volatile and led to the depreciation of the peso. 59

PMO also denies that a unilateral increase in the interest rates on the loans caused the substantial increase in the indebtedness of
respondents and points out that the promissory notes themselves specifically provided for the rates of interest as well as penalty
and other charges which were merely applied on respondents’ outstanding obligations. It should be noted, however, that at the time
of the transaction, Act No. 2655, as amended by Presidential Decree No. 116 (Usury Law), was still in full force and effect. Basic is
the rule that the laws in force at the time the contract is made governs the effectivity of its provisions. 60 Section 2 of the Usury Law
specifically provides as follows:

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in
action, a higher rate of interest or a greater sum or value, including commissions, premiums, fines and penalties, for the loan or
renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in
part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or interest
therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan
or renewal thereof or forbearance is granted: Provided, that the rate of interest under this section or the maximum rate of interest
that may be prescribed by the monetary board under this section may likewise apply to loans secured by other types of security as
may be specified by the Monetary Board.

A perusal of the promissory notes reveals that the interest charged upon the notes is dependent upon the borrowing cost of DBP
which, however, would be pegged at a fixed rate assuming certain factors. The notes dated December 11, 1980 and June 5, 1981,
for example, had a per annum interest rate of 3% over DBP’s borrowing rate that will become 1 ½% per annum in the event the
loan is drawn under the Central Bank’s Jumbo Loan. These were further subject to the condition that should the loan from where
they were drawn be fully repaid, the interest to be charged on respondents’ remaining dollar obligation would be pegged at 16% per
annum.61 The promissory note dated December 16, 1981, on the other hand, had a per annum interest rate of 4% over DBP’s
borrowing rate. This rate would also become 1 ½% per annum in the event the loan is drawn under the Central Bank’s Jumbo
Loan. However, should the loan from where respondents’ foreign currency loan was drawn be fully repaid, the interest to be
charged on their remaining dollar obligation would be pegged at 18% per annum. 62

Due to the variable factors mentioned above, it cannot be determined whether DBP did in fact apply an interest rate higher than
what is prescribed under the law. It appears on the records, however, that DBP attempted to explain how it arrived at the amount
stated in the Statement of Account63 it submitted in support of its claim but was not allowed by the trial court to do so citing the rule
that the best evidence of the same is the document itself. 64 DBP should have been given the opportunity to explain its entries in the
Statement of Account in order to place the figures that were cited in the proper context. Assuming the interest applied to the
principal obligation did, in fact, exceed 12%, in addition to the other penalties stipulated in the note, this should be stricken out for
being usurious.

In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal
debt still stands and remains valid but the stipulation as to the interest is void. The debt is then considered to be without stipulation
as to the interest. In the absence of an express stipulation as to the rate of interest, the legal rate of 12% per annum shall be
imposed.65

As to the issue raised by PMO that the injunction issued by the lower courts violated Presidential Decree No. 385, the Court agrees
with the ruling of the CA. Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not
denied substantial cash inflows which are necessary to finance development projects all over the country, by large borrowers who,
when they become delinquent, resort to court actions in order to prevent or delay the government’s collection of their debts and
loans.66

The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights.
Presidential Decree No. 385 does not provide the government blanket authority to unqualifiedly impose the mandatory provisions of
the decree without due regard to the constitutional rights of the borrowers. In fact, it is required that a hearing first be conducted to
determine whether or not 20% of the outstanding arrearages has been paid, as a prerequisite for the issuance of a temporary
restraining order or a writ of preliminary injunction. Hence, the trial court can, on the basis of the evidence then in its possession,
make a provisional determination on the matter of the actual existence of the arrearages and the amount on which the 20%
requirement is to be computed. Consequently, Presidential Decree No. 385 cannot be invoked where the extent of the loan actually
received by the borrower is still to be determined.67

Finally, respondents’ allegation that PMO is engaged in forum shopping is untenable. Forum shopping is the act of a party, against
whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum
by appeal or a special civil action of certiorari. 68 As correctly pointed out by PMO, the present petition is merely an appeal from the
adverse decision rendered in the same action where it was impleaded as co-defendant with DBP. That DBP opted to file a motion
for reconsideration with the CA rather than a direct appeal to this Court does not bar PMO from seeking relief from the judgment by
taking the latter course of action.

It must be remembered that PMO was impleaded as party defendant through the amended complaint69 dated November 25, 1987.
Persons made parties-defendants via a supplemental complaint possess locus standi or legal personality to seek a review by the
Court of the decision by the CA which they assail even if their co-defendants did not appeal the said ruling of the appellate
court.70 Even assuming that separate actions have been filed by two different parties involving essentially the same subject matter,
no forum shopping is committed where the parties did not resort to multiple judicial remedies. 71

In any event, the Court deems it fit to put an end to this controversy and to finally adjudicate the rights and obligations of the parties
in the interest of a speedy dispensation of justice, taking into account the length of time this action has been pending with the courts
as well as in light of the fact that PMO is the real party-in-interest in this case, being the successor-in-interest of DBP.

WHEREFORE, the petition is PARTLY GRANTED and the assailed Decision dated May 7, 1999 rendered by the Court of Appeals
in CA-G.R. CV No. 49239 is REVERSED AND SET ASIDE. The case is hereby remanded to the trial court for determination of the
total amount of the respondents’ obligation based on the promissory notes dated December 11, 1980, June 5, 1981 and December
16, 1981 according to the interest rate agreed upon by the parties or the interest rate of 12% per annum, whichever is lower.

No costs.

SO ORDERED.

LYDIA L. GERALDEZ, petitioner,

vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL CORPORATION, respondents.

Natividad T. Perez for petitioner.

Bito, Lozada, Ortega & Castillo for private respondent.

REGALADO, J.:

Our tourism industry is not only big business; it is a revenue support of the nation's economy. It has become a matter of public
interest as to call for its promotion and regulation on a cabinet level. We have special laws and policies for visiting tourists, but such
protective concern has not been equally extended to Filipino tourists going abroad. Thus, with the limited judicial relief available
within the ambit of present laws, our tourists often prefer who fail to deliver on their undertakings. This case illustrates the recourse
of one such tourist who refused to forget.

An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez against private respondent Kenstar
Travel Corporation, docketed as Civil Case No. Q-90-4649 of the Regional Trial Court of Quezon City, Branch 80. After the parties
1

failed to arrive at an amicable settlement, trial on the merits ensued.

Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to know about private respondent from
numerous advertisements in newspapers of general circulation regarding tours in Europe. She then contacted private respondent by
phone and the latter sent its representative, Alberto Vito Cruz, who gave her the brochure for the tour and later discussed its
highlights. The European tours offered were classified into four, and petitioner chose the classification denominated as "VOLARE 3"
covering a 22-day tour of Europe for $2,990.00. She paid the total equivalent amount of P190,000.00 charged by private respondent
for her and her sister, Dolores.

Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out that, contrary to what was stated
in the brochure, there was no European tour manager for their group of tourists, the hotels in which she and the group were bullited
were not first-class, the UGC Leather Factory which was specifically added as a highlight of the tour was not visited, and the Filipino
lady tour guide by private respondent was a first timer, that is, she was performing her duties and responsibilities as such for the
first time. 2

In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the issuance of a writ of preliminary
attachment against private respondent on the ground that it committed fraud in contracting an obligation, as contemplated in Section
1(d), Rule 57 of the Rules of Court, to which no opposition by the latter appears on the record. This was granted by the court a quo but
3

the preliminary attachment was subsequently lifted upon the filing by private respondent of a counterbond amounting to
P990,000.00. 4

During the pendency of said civil case for damages, petitioner also filed other complaints before the Department of Tourism in DOT
Case No. 90-121 and the Securities and Exchange Commission in PED Case No. 90-3738, wherein, according to petitioner, herein
5

private respondent was meted out a fine of P10,000.00 by the Commission and P5,000.00 by the Department, which facts are not
6

disputed by private respondent in its comment on the present petition.

On July 9, 1991, the court a quo rendered its decision ordering private respondent to pay petitioner P500.000.00 as moral damages,
7

P200,000.00 as nominal damages, P300,000.00 as exemplary damages, P50,000.00 as and for attorney's fees, and the costs of the
suit. On appeal, respondent court deleted the award for moral and exemplary damages, and reduced the awards for nominal
8 9

damages and attorney's fees to P30,000.00 and P10,000.00, respectively. 10

Hence, the instant petition from which, after sifting through the blades of contentions alternately thrust and parried in the exchanges
of the parties, the pivotal issue that emerges is whether or not private respondent acted in bad faith or with gross negligence in
discharging its obligations under the contract.

Both the respondent court and the court a quo agree that private respondent failed to comply faithfully with its commitments under
the Volare 3 tour program, more particularly in not providing the members of the tour group with a European tour manger whose
duty, inter alia, was to explain the points of interest of and familiarize the tour group with the places they would visit in Europe, and
in assigning instead a first timer Filipino tour guide, in the person of Rowena Zapanta, to perform that role which definitely requires
11

experience and knowledge of such places. It is likewise undisputed that while the group was able to pay a visit to the site of the UGC
Leather Factory, they were brought there at a very late hour such that the factory was already closed and they were unable to make
purchases at supposedly discounted prices. As to the first-class hotels, however, while the court a quo found that the hotels were
12

not fist-class, respondent court believed otherwise, or that, at least, there was substantial compliance with such a representation.

While clearly there was therefore a violation of the rights of petitioner under the aforementioned circumstances, respondent court,
contrary to the findings of the trial court, ruled that no malice or bad faith could be imputed to private respondent, hence there is no
justification for the award of moral and exemplary damages. Furthermore, it held that while petitioner is entitled to nominal
damages, the amount awarded by the trial court was unconscionable since petitioner did not suffer actual or substantial damage
from the breach of contract, hence its reduction of such award as hereinbefore stated.
13

After thorough and painstaking scrutiny of the case records of both the trial and appellate courts, we are satisfactorily convinced,
and so hold, that private respondent did commit fraudulent misrepresentations amounting to bad faith, to the prejudice of petitioner
and the members of the tour group.

By providing the Volare 3 tourist group, of which petitioner was a member, with an inexperienced and a first timer tour escort,
private respondent manifested its indifference to the convenience, satisfaction and peace of mind of its clients during the trip, despite
its express commitment to provide such facilities under the Volare 3 Tour Program which had the grandiose slogan "Let your heart
sing. 14

Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to Europe, cannot effectively acquaint the
15

tourists with the interesting areas in the cities and places included in the program, or to promptly render necessary assistance,
especially where the latter are complete strangers thereto, like witnesses Luz Sui Haw and her husband who went to Europe for their
honeymoon. 16

We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate and conscious choice on the part of
private respondent in order to afford her an on-the-job training and equip her with the proper opportunities so as to later qualify her
as an "experienced" tour guide and eventually be an asset of respondent corporation. Unfortunately, this resulted in a virtual project
17

experimentation with petitioner and the members of the tour as the unwitting participants.

We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta as a qualified tour guide for the
Volare 3 tour package. It brooks no argument that to be true to its undertakings, private respondent should have selected an
experienced European tour guide, or it could have allowed Zapanta to go merely as an understudy under the guidance, control and
supervision of an experienced and competent European or Filipino tour guide, who could give her the desired training.
18

Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only when the latter ask for assistance but at
the moment such need becomes apparent. In other words, the tour guide, especially by reason of her experience in previous tours,
must be able to anticipate the possible needs and problems of the tourists instead of waiting for them to bring it to her attention.
While this is stating the obvious, it is her duty to see to it that basic personal necessities such as soap, towels and other daily amenities
are provided by the hotels. It is also expected of her to see to it that the tourists are provided with sanitary surroundings and to
actively arrange for medical attention in case of accidents, as what befell petitioner's sister and wherein the siblings had to practically
fend for themselves since, after merely calling for an ambulance, Zapanta left with the other tour participants. 19

Zapanta fell far short of the performance expected by the tour group, her testimony in open court being revelatory of her inexperience
even on the basic function of a tour guide, to wit:

Q Now, are you aware that there were times that the tourists under the "Volare 3" were not
provided with soap and towels?

A They did not tell me that but I was able to ask them later on but then nobody is complaining. .
20

...

The inability of the group to visit the leather factory is likewise reflective of the neglect and ineptness of Zapanta in attentively
following the itinerary of the day. This incompetence must necessarily be traced to the lack of due diligence on the part of private
respondent in the selection of its employees. It is true that among the thirty-two destinations, which included twenty-three cities and
special visits to nine tourist spots, this was the only place that was not visited. It must be noted, however, that the visit to the UGC
21

Leather Factory was one of the highlights of the Volare 3 program which even had to be specifically inserted in the itinerary, hence
22

it was incumbent upon the organizers of the tour to take special efforts to ensure the same. Besides, petitioner did expect much from
the visit to that factory since it was represented by private respondent that quality leather goods could be bought there at lower
prices. 23

Private respondent represents Zapanta's act of making daily overseas calls to Manila as an exercise of prudence and diligence on the
latter's part as a tour guide. It further claims that these calls were needed so that it could monitor the progress of the tour and
24

respond to any problem immediately. We are not persuaded. The truth of the matter is that Zapanta, as an inexperienced trainee-
25

on-the-job, was required to make these calls to private respondent for the latter to gauge her ability in coping with her first assignment
and to provide instructions to her. 26

Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest disregard of its specific assurances to the
tour group, resulting in agitation and anxiety on their part, and which deliberate omission is contrary to the elementary rules of good
faith and fair play. It is extremely doubtful if any group of Filipino tourists would knowingly agree to be used in effect as guinea
pigs in an employees' training program of a travel agency, to be conducted in unfamiliar European countries with their diverse
cultures, lifestyles and languages.

On the matter of the European tour manager, private respondent's advertisement in its tour contract declares and represents as
follows:

FILIPINO TOUR ESCORT!

He will accompany you throughout Europe. He speaks your language, shares your culture and feels your
excitement.

He won't be alone because you will also be accompanied by a . . .

 EUROPEAN TOUR MANAGER!

You get the best of both worlds. Having done so may tours in the past with people like you, he knows your
sentiments, too. So knowledgeable about Europe, there is hardly a question he can't answer. 27

Private respondent contends that the term "European Tour Manager" does not refer to an individual but to an organization, allegedly
the Kuoni Travel of Switzerland which supposedly prepared the itinerary for its "Volare Europe Tour," negotiated with all the hotels
in Europe, selected tourist spots and historical places to visit, and appointed experienced local tour guides for the tour group. 28

We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.

A cursory reading of said advertisement will readily reveal the express representation that the contemplated European tour manager
is a natural person, and not a juridical one as private respondent asserts. A corporate entity could not possibly accompany the
members of the tour group to places in Europe; neither can it answer questions from the tourists during the tour. Of course, it is
absurd that if a tourist would want to know how he could possibly go to the nearest store or supermarket, he would still have to call
Kuoni Travel of Switzerland.

Furthermore, both lower courts observed, and we uphold their observations, that indeed private respondent had the obligation to
provide the tour group not only with a European tour manger, but also with local European tour guides. The latter, parenthetically,
were likewise never made available. Zapanta claims that she was accompanied by a European local tour guide in most of the major
29

cities in Europe. We entertain serious doubts on, and accordingly reject, this pretension for she could not even remember the name
of said European tour guide. If such a guide really existed, it is incredible why she could not even identify the former when she
30

testified a year later, despite the length of their sojourn and the duration of their association.

As to why the word "he" was used in the aforequoted advertisement, private respondent maintains that the pronoun "he" also
includes the word "it," as where it is used as a "nominative case form in general statements (as in statutes) to include females, fictitious
persons (as corporations)." We are constrained to reject this submission as patently strained and untenable. As already
31

demonstrated, it is incredible that the word "he" was used by private respondent to denote an artificial or corporate being. From its
advertisement, it is beyond cavil that the import of the word "he" is a natural and not a juridical person. There is no need for further
interpretation when the wordings are clear. The meaning that will determine the legal effect of a contract is that which is arrived at
by objective standards; one is bound, not by what he subjectively intends, but by what he leads others reasonably to think he intends. 32

In an obvious but hopeless attempt to arrive at a possible justification, private respondent further contends that it explained the
concept of a European tour manager to its clients at the pre-departure briefing, which petitioner did not attend. Significantly,
33

however, private respondent failed to present even one member of the tour group to substantiate its claim. It is a basic rule of evidence
that a party must prove his own affirmative allegations. Besides, if it was really its intention to provide a juridical European tour
34

manager, it could not have kept on promising its tourists during the tour that a European tour manager would come, supposedly 35

to join and assist them.

Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its responsibility as printed on the face
of its brochure on the Volare 3 program, to wit:

RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL AGENT, THEIR EMPLOYEES OR

SUB-AGENTS SHALL BE RESPONSIBLE ONLY FOR BOOKING AND MAKING ARRANGEMENTS AS YOUR
AGENTS. Kenstar Travel Corporation, your travel Agent, their employees or sub-agents assume no responsibility
or liability arising out of or in connection with the services or lack of services, of any train, vessel, other conveyance
 or station whatsoever in the performance of their duty to the passengers or guests, neither will they be responsible for
any act, error or omission, or of any damages, injury, loss, accident, delay or irregularity which may be occasioned by reason
(of) or any defect in . . . lodging place or any facilities . . . . (Emphasis by private respondent.) 36

While, generally, the terms of a contract result from the mutual formulation thereof by the parties thereto, it is of common knowledge
that there are certain contracts almost all the provisions of which have been drafted by only one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only participation of the party is the affixing of his signature or his "adhesion"
thereto. In situations like these, when a party imposes upon another a ready-made form of contract, and the other is reduced to
37 38

the alternative of taking it or leaving it, giving no room for negotiation and depriving the latter of the opportunity to bargain on
equal footing, a contract of adhesion results. While it is true that an adhesion contract is not necessarily void, it must nevertheless be
construed strictly against the one who drafted the same. This is especially true where the stipulations are printed in fine letters and
39

are hardly legible as is the case of the tour contract involved in the present controversy.
40

Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private respondent still cannot be exculpated
for the reason that responsibility arising from fraudulent acts, as in the instant case, cannot be stipulated against by reason of public
policy. Consequently, for the foregoing reasons, private respondent cannot rely on its defense of "substantial compliance" with the
contract.

Private respondent submits likewise that the tour was satisfactory, considering that only petitioner, out of eighteen participants in
the Volare 3 Tour Program, actually complained. We cannot accept this argument. Section 28, Rule 130 of the Rules of Court declares
41

that the rights of a party cannot be prejudiced by an act, declaration, or omission of another, a statutory adaptation of the first branch
of the hornbook rule of res inter alios acta which we do not have to belabor here.
42

Besides, it is a commonly known fact that there are tourists who, although the tour was far from what the tour operator undertook
under the contract, choose to remain silent and forego recourse to a suit just to avoid the expenses, hassle and rancor of litigation,
and not because the tour was in accord with was promised. One does not relish adding to the bitter memory of a misadventure the
unpleasantness of another extended confrontation. Furthermore, contrary to private respondent's assertion, not only petitioner but
two other members of the tour group, Luz Sui Haw and Ercilla Ampil, confirmed petitioner's complaints when they testified as
witnesses for her as plaintiff in the court below. 43

Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3 tour package that the hotels it had
chosen would provide the tourists complete amenities and were conveniently located along the way for the daily itineraries. It 44

turned out that some of the hotels were not sufficiently equipped with even the basic facilities and were at a distance from the cities
covered by the projected tour. Petitioner testified on her disgust with the conditions and locations of the hotels, thus:

Q And that these bathrooms ha(ve) bath tub(s) and hot and cold shower(s)?

A Not all, sir.

Q Did they also provide soap and towels?

A Not all, sir, some (had) no toilet paper. 45

Q Which one?

A The 2 stars, the 3 stars and some 4 stars (sic) hotels.

 Q What I am saying . . .

A You are asking a question? I am answering you. 2 stars, 3 stars and some 4 stars (sic) hotels,
no soap, toilet paper and (the) bowl
stinks. . . .

xxx xxx xxx

Q And that except for the fact that some of these four star hotels were outside the city they
provided you with the comfort?

A Not all, sir.

Q Can you mention some which did not provide you that comfort?

A For example, if Ramada Hotel Venezia is in Quezon City, our hotel is in Meycauayan. And if
Florence or Ferenze is in manila, our hotel is in Muntinlupa. 46

xxx xxx xxx

A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also outside the city. Suppose
Barcelona is in Quezon City, our hotel is in Marilao. We looked for this hotel inside the city of
Barcelona for three (3) hours. We wasted our time looking for almost all the hotels and places
where to eat. That is the kind of tour that you have. 47

Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon, shared the sentiments of petitioner
and testified as follows:

Q . . . Will you kindly tell us why the hotels where you stayed are not considered first class
hotels?

A Because the hotels where we went, sir, (are) far from the City and the materials used are not
first class and at times there were no towels and soap. And the two (2) hotels in Nevers and
Florence the conditions (are) very worse (sic). 48

Q Considering that you are honeymooners together with your husband, what (were) your
feelings when you found out that the condition were not fulfilled by the defendant?

A I would like to be very honest. I got sick when I reached Florence and half of my body got itch
(sic). I think for a honeymooner I would like to emphasize that we should enjoy that day of our
life and it seems my feet kept on itching because of the condition of the hotel. And I was so
dissatisfied because the European Tour Manager was not around there (were) beautiful
promises. They kept on telling us that a European Tour Manager will come over; until our Paris
tour was ended there was no European tour manager. 49

xxx xxx xxx

 Q You will file an action against the defendant because there was a disruption of your happiness,
in your honeymoon, is that correct?

A That is one of my causes of (sic) coming up here. Secondly, i was very dissatisfied (with) the
condition. Thirdly, that Volare 89 it says it will let your heart sing. That is not true. There was no
European tour (manager) and the highlights of the tour (were) very poor. The hotels were worse
(sic) hotels. 50

Q All the conditions of the hotels as you . . .

A Not all but as stated in the brochure that it is first class hotel. The first class hotels state that all
things are beautiful and it is neat and clean with complete amenities and I encountered the
Luxembourg hotel which is quite very dilapidated because of the flooring when you step on the
side "kumikiring" and the cabinets (are) antiques and as honeymooners we don't want to be
disturbed or seen. 51

xxx xxx xxx

Q None of these are first class hotels?

A Yes, sir.

Q So, for example Ramada Hotel Venezia which according to Miss Geraldez is first class hotel is
not first class hotel?

A Yes, sir.

Q You share the opinion of Miss Geraldez?

A Yes, sir.

Q The same is true with Grand Hotel Palatino which is not a first class hotel?

A Yes, sir.

Q And Hotel Delta Florence is not first class hotel?

A That is how I got my itch, sir. Seven (7) days of itch.

Q How about Hotel Saint-Jacquez, Paris?

A It is far from the city. It is not first class hotel.

Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class hotel?

A Yes, sir.
 Q Hotel De Nevers is not a first class hotel?

A Yes, sir.

Q Hotel Roc Blanc Andorra is not a first class hotel?

A Yes, sir.

Q Saint Just Hotel, Barcelona is not a first class hotel?

A Yes, sir.

Q Hotel Pullman Nice neither is not a first class hotel?

A Yes, sir.

Q Hotel Prinz Eugen and Austrotel are not first class hotels?

A Yes, sir. 52

Private respondent cannot escape responsibility by seeking refuge under the listing of first-class hotels in publications like the
"Official Hotel and Resort Guide" and Worldwide Hotel Guide." Kuoni Travel, its tour operator, which prepared the hotel listings,
53 54

is a European-based travel agency and, as such, could have easily verified the matter of first-class accommodations. Nor can it
55

logically claim that the first-class hotels in Europe may not necessarily be the first-class hotels here in the Philippines. It is reasonable
56

for petitioner to assume that the promised first-class hotels are equivalent to what are considered first-class hotels in Manila. Even
assuming arguendo that there is indeed a difference in classifications, it cannot be gainsaid that a first-class hotel could at the very
least provide basic necessities and sanitary accommodations. We are accordingly not at all impressed by private respondent's
attempts to trivialize the complaints thereon by petitioner and her companions.

In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely provided such "first class" hotels
which are commensurate to the tourists budget, or which were, under the given circumstances, the "best for their money." It
postulated that it could not have offered better hostelry when the consideration paid for hotel accommodations by the tour
participants was only so much, and the tour price of $2,990.00 covers a European tour for 22 days inclusive of lower room rates and
57

meals. this is implausible, self-serving and borders on sophistry.

58

The fact that the tourists were to pay a supposedly lower amount, such that private respondent allegedly retained hardly enough as
reasonable profit, does not justify a substandard form of service in return. It was private respondent, in the first place, which fixed
59

the charges for the package tour and determined the services that could be availed of corresponding to such price. Hence, it cannot
now be heard to complain that it only made a putative marginal profit out of the transaction. if it could not provide the tour
participants with first-class lodgings on the basis of the amount that they paid, it could and should have instead increased the price
to enable it to arrange for the promised first-class accommodations.

On the foregoing considerations, respondent court erred in deleting the award for moral and exemplary damages. Moral damages
may be awarded in breaches of contract where the obligor acted fraudulently or in bad faith. From the facts earlier narrated, private
60

respondent can be faulted with fraud in the inducement, which is employed by a party to a contract in securing the consent of the
other.
This fraud or dolo which is present or employed at the time of birth or perfection of a contract may either be dolo causante or dolo
incidente. The first, or causal fraud referred to in Article 1338, are those deceptions or misrepresentations of a serious character
employed by one party and without which the other party would not have entered into the contract. Dolo incidente, or incidental
fraud which is referred to in Article 1344, are those which are not serious in character and without which the other party would still
have entered into the contract. Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only to
61

some particular or accident of the

obligations. The effects of dolo causante are the nullity of the contract and the indemnification of damages, and dolo incidente also
62 63

obliges the person employing it to pay damages. 64

In either case, whether private respondent has committed dolo causante or dolo incidente by making misrepresentations in its contracts
with petitioner and other members of the tour group, which deceptions became patent in the light of after-events when, contrary to
its representations, it employed an inexperienced tour guide, housed the tourist group in substandard hotels, and reneged on its
promise of a European tour manager and the visit to the leather factory, it is indubitably liable for damages to petitioner.

In the belief that an experienced tour escort and a European tour manager would accompany them, with the concomitant reassuring
and comforting thought of having security and assistance readily at hand, petitioner was induced to join the Volare 3 tourists, instead
of travelling alone She likewise suffered serious anxiety and distress when the group was unable to visit the leather factory and
65

when she did not receive first-class accommodations in their lodgings which were misrepresented as first-class hotels. These, to our
mind, justify the award for moral damages, which are in the category of an award designed to compensate the claimant for that
injury which she had suffered, and not as a penalty on the wrongdoer, we believe that an award of P100,000.00 is sufficient and
66

reasonable.

When moral damages are awarded, especially for fraudulent conduct, exemplary damages may also be decreed. Exemplary damages
are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory
damages. According to the code Commission, exemplary damages are required by public policy, for wanton acts must be
suppressed. An award, therefore, of P50,000.00 is called for to deter travel agencies from resorting to advertisements and
67

enticements with the intention of realizing considerable profit at the expense of the public, without ensuring compliance with their
express commitments. While, under the present state of the law, extraordinary diligence is not required in travel or tour contracts,
such as that in the case at bar, the travel agency acting as tour operator must nevertheless be held to strict accounting for contracted
services, considering the public interest in tourism, whether in the local or in the international scene. Consequently, we have to
likewise reject the theory of private respondent that the promise it made in the tour brochure may be regarded only as
"commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since we are awarding moral and exemplary damages, and 69

considering the legal importance of the instant litigation and the efforts of counsel evident from the records of three levels of the
judicial hierarchy, we favorably consider the amount of P20,000.00 therefor.

WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby SET ASIDE, and another one rendered,
ordering private respondent Kenstar Travel Corporation to pay petitioner Lydia L. Geraldez the sums of P100,000.00 by way of moral
damages, P50,000.00 as exemplary damages, and P20,000.00 as and for attorney's fees, with costs against private respondent. The
award for nominal damages is hereby deleted.