FIRST DIVISION[G.R. No. 118248. April 5, 2000]DKC HOLDINGS CORPORATION, petitioner, vs. COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR METRO MANILA, DISTRICT III, respondents. francisD E C I S I O NYNARES_SANTIAGO, J.:This is a petition for review on certiorari seeking the reversal of the December 5, 1994 Decision of the Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings Corporation vs. Victor U. Bartolome, et al.", [1] affirming in toto the January 4, 1993 Decision of the Regional Trial Court of Valenzuela, Branch 172, [2] which dismissed Civil Case No. 3337-V-90 and ordered petitioner to pay P30,000.00 as attorney’s fees.The subject of the controversy is a 14,021 square meter parcel of land located in Malinta, Valenzuela, Metro Manila which was originally owned by private respondent Victor U. Bartolome’s deceased mother, Encarnacion Bartolome, under Transfer Certificate of Title No. B-37615 of the Register of Deeds of Metro Manila, District III. This lot was in front of one of the textile plants of petitioner and, as such, was seen by the latter as a potential warehouse site.On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion Bartolome, whereby petitioner was given the option to lease or lease with purchase the subject land, which option must be exercised within a period of two years counted from the signing of the Contract. In turn, petitioner undertook to pay P3,000.00 a month as consideration for the reservation of its option. Within the two-year period, petitioner shall serve formal written notice upon the lessor Encarnacion Bartolome of its desire to exercise its option. The contract also provided that in case petitioner chose to lease the property, it may take actual possession of the premises. In such an event, the lease shall be for a period of six years, renewable for another six years, and the monthly rental fee shall be P15,000.00 for the first six years and P18,000.00 for the next six years, in case of renewal.Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her death in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments. iskaMeanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over all the properties of Encarnacion, including the subject lot. Accordingly, respondent Register of Deeds cancelled Transfer Certificate of Title No. B-37615 and issued Transfer Certificate of Title No. V-14249 in the name of Victor Bartolome.On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising its option to lease the property, tendering the amount of P15,000.00 as rent for the month of March. Again, Victor refused to accept the tendered rental fee and to surrender possession of the property to petitioner.Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking Corporation, Cubao Branch, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee for March as well as P6,000.00 reservation fees for the months of February and March.Petitioner also tried to register and annotate the Contract on the title of Victor to the property. Although respondent Register of Deeds accepted the required fees, he nevertheless refused to register or annotate the same or even enter it in the day book or primary register.Thus, on April 23, 1990, petitioner filed a complaint for specific performance and damages against Victor and the Register of Deeds, [3] docketed as Civil Case No. 3337-V-90 which was raffled off to Branch 171 of the Regional Trial Court of Valenzuela. Petitioner prayed for the surrender and delivery of possession of the subject land in accordance with the Contract terms; the surrender of title for registration and annotation thereon of the Contract; and the payment of P500,000.00 as actual damages, P500,000.00 as moral damages, P500,000.00 as exemplary damages and P300,000.00 as attorney’s fees.Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss [4] was filed by one Andres Lanozo, who claimed that he was and has been a tenant-tiller of the subject property, which was agricultural riceland, for forty-five years. He questioned the jurisdiction of the lower court over the property and invoked the Comprehensive Agrarian Reform Law to protect his rights that would be affected by the dispute between the original parties to the case. ellaOn May 18, 1990, the lower court issued an Order [5] referring the case to the Department of Agrarian Reform for preliminary determination and certification as to whether it was proper for trial by said court.On July 4, 1990, the lower court issued another Order [6] referring the case to Branch 172 of the RTC of Valenzuela which was designated to hear cases involving agrarian land, after the Department of Agrarian Reform issued a letter-certification stating that referral to it for preliminary determination is no longer required.On July 16, 1990, the lower court issued an Order denying the Motion to Intervene, [7] holding that Lanozo’s rights may well be ventilated in another proceeding in due time.

After trial on the merits, the RTC of Valenzuela, branch 172 rendered its Decision on January 4, 1993, dismissing the Complaint and ordering petitioner to pay Victor P30,000.00 as attorney’s fees. On appeal to the CA, the Decision was affirmed in toto.Hence, the instant Petition assigning the following errors:(A)FIRST ASSIGNMENT OF ERRORTHE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON THE NOTICE TO EXERCISE OPTION WAS NOT TRANSMISSIBLE.(B)SECOND ASSIGNMENT OF ERRORTHE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF OPTION MUST BE SERVED BY DKC UPON ENCARNACION BARTOLOME PERSONALLY.(C) nigelTHIRD ASSIGNMENT OF ERRORTHE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT WAS ONE-SIDED AND ONEROUS IN FAVOR OF DKC.(D)FOURTH ASSIGNMENT OF ERRORTHE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF A REGISTERED TENANCY WAS FATAL TO THE VALIDITY OF THE CONTRACT.(E)FIFTH ASSIGNMENT OF ERRORTHE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-APPELLANT WAS LIABLE TO DEFENDANT-APPELLEE FOR ATTORNEY’S FEES. [8]The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy entered into by the late Encarnacion Bartolome with petitioner was terminated upon her death or whether it binds her sole heir, Victor, even after her demise.

Both the lower court and the Court of Appeals held that the said contract was terminated upon the death of Encarnacion Bartolome and did not bind Victor because he was not a party thereto.Article 1311 of the Civil Code provides, as follows-"ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. brnadox x x x x x x x x."The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation or (3) provision of law.In the case at bar, there is neither contractual stipulation nor legal provision making the rights and obligations under the contract intransmissible. More importantly, the nature of the rights and obligations therein are, by their nature, transmissible.The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as follows:"Among contracts which are intransmissible are those which are purely personal, either by provision of law, such as in cases of partnerships and agency, or by the very nature of the obligations arising therefrom, such as those requiring special personal qualifications of the obligor. It may also be stated that contracts for the payment of money debts are not transmitted to the heirs of a party, but constitute a charge against his estate. Thus, where the client in a contract for professional services of a lawyer died, leaving minor heirs, and the lawyer, instead of presenting his claim for professional services under the contract to the probate court, substituted the minors as parties for his client, it was held that the contract could not be enforced against the minors; the lawyer was limited to a recovery on the basis of quantum meruit." [9]In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties, the agreement is of a personal nature, and terminates on the death of the party who is required to render such service." [10] marinellaIt has also been held that a good measure for determining whether a contract terminates upon the death of one of the parties is whether it is of such a character that it may be performed by the promissor’s personal representative. Contracts to perform personal acts which cannot be as well performed by others are discharged by the death of the promissor. Conversely, where the service or act is of such a character that it may as well be performed by another, or where the contract, by its terms, shows that performance by others was contemplated, death does not terminate the contract or excuse nonperformance. [11]In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather, the obligation of Encarnacion in the contract to deliver possession of the subject property to

petitioner upon the exercise by the latter of its option to lease the same may very well be performed by her heir Victor.As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs." [12] In 1952, it was ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the reconveyance had not been made, the heirs can be compelled to execute the proper deed for reconveyance. This was grounded upon the principle that heirs cannot escape the legal consequence of a transaction entered into by their predecessor-in-interest because they have inherited the property subject to the liability affecting their common ancestor. [13]It is futile for Victor to insist that he is not a party to the contract because of the clear provision of Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest between him and his deceased mother. He only succeeds to what rights his mother had and what is valid and binding against her is also valid and binding as against him. [14] This is clear from Parañaque Kings Enterprises vs. Court of Appeals, [15] where this Court rejected a similar defense-alonzoWith respect to the contention of respondent Raymundo that he is not privy to the lease contract, not being the lessor nor the lessee referred to therein, he could thus not have violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the obligations of the lessor under the lease contract. Moreover, he received benefits in the form of rental payments. Furthermore, the complaint, as well as the petition, prayed for the annulment of the sale of the properties to him. Both pleadings also alleged collusion between him and respondent Santos which defeated the exercise by petitioner of its right of first refusal.In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not indispensable, party to the case. A favorable judgment for the petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the property over which petitioner would like to assert its right of first option to buy.In the case at bar, the subject matter of the contract is likewise a lease, which is a property right. The death of a party does not excuse nonperformance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract. [16]Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the subject Contract of Lease with Option to Buy.That being resolved, we now rule on the issue of whether petitioner had complied with its obligations under the contract and with the requisites to exercise its option. The payment by petitioner of the reservation fees during the two-year period within which it had the option to lease or purchase the property is not disputed. In fact, the payment of such reservation fees, except those for February and March, 1990 were admitted by Victor. [17] This is clear from the transcripts, to wit-"ATTY. MOJADO:

One request, Your Honor. The last payment which was allegedly made in January 1990 just indicate in that stipulation that it was issued November of 1989 and postdated Janaury 1990 and then we will admit all. rodp;foCOURT:

All reservation fee?ATTY. MOJADO:

Yes, Your Honor.COURT:

All as part of the lease?ATTY. MOJADO:

Reservation fee, Your Honor. There was no payment with respect to payment of rentals." [18]Petitioner also paid the P15,000.00 monthly rental fee on the subject property by depositing the same in China Bank Savings Account No. 1-04-02558-I-1, in the name of Victor as the sole heir of Encarnacion Bartolome, [19] for the months of March to July 30, 1990, or a total of five (5) months, despite the refusal of Victor to turn over the subject property. [20]Likewise, petitioner complied with its duty to inform the other party of its intention to exercise its option to lease through its letter dated Match 12, 1990, [21] well within the two-year period for it to exercise its option. Considering that at that time Encarnacion Bartolome had already passed away, it was legitimate for petitioner to have addressed its letter to her heir.It appears, therefore, that the exercise by petitioner of its option to lease the subject property was made in accordance with the contractual provisions. Concomitantly, private respondent Victor Bartolome has the obligation to surrender possession of and lease the premises to petitioner for a period of six (6) years, pursuant to the Contract of Lease with Option to Buy. micksComing now to the issue of tenancy, we find that this is not for this Court to pass upon in the present petition. We note that the Motion to Intervene and to Dismiss of the alleged tenant,

Andres Lanozo, was denied by the lower court and that such denial was never made the subject of an appeal. As the lower court stated in its Order, the alleged right of the tenant may well be ventilated in another proceeding in due time.WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial Court of Valenzuela in Civil Case No. 3337-V-90 are both SET ASIDE and a new one rendered ordering private respondent Victor Bartolome to:(a) surrender and deliver possession of that parcel of land covered by Transfer Certificate of Title No. V-14249 by way of lease to petitioner and to perform all obligations of his predecessor-in-interest, Encarnacion Bartolome, under the subject Contract of Lease with Option to Buy;(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to respondent Register of Deeds for registration and annotation thereon of the subject Contract of Lease with Option to Buy;(c) pay costs of suit. Scä Respondent Register of Deeds is, accordingly, ordered to register and annotate the subject Contract of Lease with Option to Buy at the back of Transfer Certificate of Title No. V-14249 upon submission by petitioner of a copy thereof to his office.SO ORDEREDRepublic of the PhilippinesSUPREME COURTManilaEN BANCG.R. No. L-22611 May 27, 1968COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.VISAYAN ELECTRIC COMPANY and THE COURT OF TAX APPEALS, respondents.Office of the Solicitor General for petitioner.Jesus P. Garcia for respondents.SANCHEZ, J.:The problems cast in legal setting in this petition for review1 of the judgment of the Court of Tax Appeals are: Is Visayan Electric Company liable for deficiency income tax on dividends from the stock investment of its employees' reserve fund for pensions? Is it also liable for 25% surcharge on alleged late payment of franchise tax? Respondent company is the holder of a legislative franchise, Act 3499 of the Philippine Legislature, to operate and maintain an electric light, heat, and power system in the City of Cebu, certain municipalities in the Province of Cebu, and other surrounding places.In a board of directors' meeting held on March 14, 1949, respondent company established a pension fund, known as the "Employees' Reserve for Pensions." Said fund is for the benefit of its "present and future" employees, in the event of retirement, accident or disability. Every month thereafter an amount has been set aside for this purpose. It is taken from the gross operating receipts of the company. This reserve fund was later invested by the company in stocks of San Miguel Brewery, Inc., for which dividends have been regularly received. But these dividends were not declared for tax purposes.It was in a letter dated August 9, 1957 that the Auditor General gave notice that as the company has retained full control of the fund, therefore, the dividends are not tax exempt; but that such dividends may be excluded from gross receipts for franchise tax purposes, provided the same are declared for income tax purposes.In pursuance of the above letter, the Provincial Auditor of Cebu allowed the company the option to declare the dividends either as part of the company's income for income tax purposes or as part of its income for franchise tax purposes. The company elected the latter.2The Revenue Examiner of Cebu, however, conducted a separate investigation for the Bureau of Internal Revenue. His report dated September 17, 1959 likewise revealed that the "company itself is the custodian or has the complete control of the fund." That report disagreed with the action of the Provincial Auditor, instead considered the dividends as subject to corporate income tax under Section 24 of the National Internal Revenue Code.Said report further disclosed that: (a) during the years 1957, 1958 and 1959, some payments of the franchise tax were made after fifteen days — although within twenty days — of the month following the end of each calendar quarter, allegedly contrary to Section 259 of the Tax Code, which imposes a 25% surcharge if the franchise faxes "remain unpaid for fifteen days from and after the date on which they must be paid"; and (b) from 1954 to 1959, the company had not paid additional residence tax imposed by Section 2 of Act 465.With the foregoing report as basis, the Commissioner of Internal Revenue, in two letters of demand dated September 7 and 15, 1960, assessed the following amounts against the company: (a) P2,443.30 representing deficiency income tax for the years 1953 to 1958, plus interest and 50% surcharge; (b) P3,850.00 as additional residence tax from 1954 to 1959; and (c) P35,419.05 as 25% surcharge for late payment of franchise taxes for the years 1957, 1958 and 1959.

Reconsideration having been denied, the company went to the Court of Tax Appeals on petition for review.On January 31, 1964, the Court of Tax Appeals sustained the correctness of the additional residence tax assessments3 but freed the company from liability for deficiency income tax and the 25% surcharge for late payment of franchise taxes.It is now the turn of the Commissioner of Internal Revenue to appeal to this Court.1. Admittedly, the investment of the fund in shares of stocks of the San Miguel Brewery, Inc. is not a part of respondent company's business. Neither is it necessary or incidental to its operation under its franchise. And yet those dividends were assessed by petitioner as part of the income of respondent company. The tax court joins petitioner in this, but applied the following provision in Section 8, Act 3499 — the company's legislative franchise — in holding that the dividends are not subject to income tax, viz.:SEC. 8. The grantee shall pay the same taxes as are now or may hereafter be required by law from other persons, on its real estate, buildings, plant, machinery, and other personal property, except property declared exempt in this section. In consideration of the franchise and rights hereby granted, the grantee shall pay into the municipal treasury of each municipality in which it is supplying electricity to the public under this franchise, a tax equal to two per centum of the gross earnings for electric current sold under this franchise in each of the respective municipalities. Said percentage shall be due and payable quarterly and shall be in lieu of all taxes of any kind levied, established or collected by any authority whatsoever, now or in the future, on its poles, wires, insulators, switches, transformers and other structures, installations, conductors and accessories, placed in and over the public streets, avenues, roads, thoroughfares, squares, bridges, and other places and on its franchises, rights, privileges, receipts, revenues and profits, from which taxes the grantee is hereby expressly exempted.4We perceive incorrectness of this approach by the Tax Court. What is envisioned in the statute granting exemption, so far as is pertinent to this case, is the last underscored portion thereof which speaks of its receipts, revenues and profits, "from which taxes the grantee is hereby expressly exempted." The heavy accent is on the word its. Plain import of this word, taken in context, is that the receipts, revenues and profits, which could be tax-exempt under the statute, must be the company's — not somebody else's. No doubt this provision should not be broadened so as to include situations which by fail intendment are excluded therefrom. To do so is to take too loose a view of the statute.The disputed income are not receipts, revenues or profits of the company. They do not go to the general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees,5 "to be distributed among the employees."6Not escaping notice is that by the resolution of respondent company's board and the setting aside of monthly amounts from its gross operating receipts for that fund, said company was merely acting, with respect to such fund, as trustee for its employees. For, indeed, the intention to establish a trust in favor of the employees is clear. A valid express trust has thus been created.7 And, for tax purposes, the employees' reserve fund is a separate taxable entity.8 Respondent company then, while retaining legal title and custody9 over the property, holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the absence of any condition therein which would, in effect, destroy the intention to create a trust.10Given the fact that the dividends are returns of the trust estate and not of the grantor company, we must say that petitioner misconceived the import of the law when he assessed said dividends as part of the income of the company. Similarly, the tax court should not have considered them at all as the company's "receipts, revenues and profits" which are exempt from income tax.2. As we look back at the resolution creating the employees' reserve fund and having in mind the company's admission that it is "solely for the benefit of the employees" and that the company is holding said fund "merely as trustee of its employees,"11 we reach the conclusion that the fund may not be diverted for other purposes, and that the trust so created is irrevocable. For, really nothing in respondent company's acts suggests that it reserved the power to revoke that fund or for that matter appropriate it for itself. The trust binds the company to its employees. The trust created is not therefore a revocable trust a provided in Section 59 of the Tax Code.12 Nor is it a trust contemplated in Section 60, the income from which is for the benefit of the grantor.13This state of facts calls for inquiry into the applicability of Section 56 of the Tax Code, which in part reads:SEC. 56.Imposition of tax — (a) Application of tax. — The taxes imposed by this Title upon individuals shall apply to the income of estate or of any kind of property held in trust, including —(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests and income accumulated or held for future distribution under the terms of the will or trust;x x x x x x x x x(c) Computation and payment —

(1) In general. — The tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary, except as provided in Section fifty-nine (relating to revocable trust) and section sixty (relating to income for the benefit of the grantor);x x x x x x x x x14Of interest here is that an amendment to Section 56 — Republic Act 1983,15 approved on June 22, 1957 — singles out employees' trust for tax exemption in the following language:(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other then for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.16A dig into the legislative history unearths the fact that this exemption in Republic Act 1983 was conceived in order to encourage the formation of pension trust systems for the benefit of laborers and employees outside the Social Security Act.17Understandably, the second requirement in paragraph (b) of Section 56 of the Tax Code as it was inserted by Republic Act 1983 — non-diversion of fund — was written into the statute the better to insure that the trust fund and its income will be used "for the exclusive benefit" of the employees.Of importance is the employment of the word plan as it is applied to pension set forth in the first part of paragraph (b) aforesaid. Worth mentioning is that a sizeable portion of our Tax Code has been lifted from the United States Internal Revenue Code. To be sure, Republic Act 1983 which amends Section 56 of our Tax Code is substantially similar in terms to Section 165 of the United States Internal Revenue Code of 1939.18 It is thus permissible for this Court to look into the interpretations of the American counterpart in an effort to determine the congressional scheme in exempting employees' trust from taxation.In the American jurisdiction, the word plan is emphasized. To qualify for exemption, the employees' trust must refer to a definite program, scheme or plan. It must be set up in good faith. It must be acturially sound. Under such plan, employees generally are to be extended retirement and pension benefits. But why? The fund is not thereafter to be controlled or used for the benefit of the company in any way.19 A trust device used to disguise added compensation to the shareholders and officers of a company — and thereby avoid present payment of income tax thereon — instead of providing for future security of the employees in general will not qualify under the exemption.20 Hubbell vs. Commissioner of Internal Revenue, 150 F. 2d 516, 161 A.L.R. 764, 773, which was decided under the 1939 version, confirms this view. There, the United States Circuit Court of Appeals took into account the direction of the amendments in construing congressional purpose, and held that the 1942 amendment which added the requirement of non-discrimination in favor of shareholders, officials, or highly-compensated employees presents no apparent change in congressional purpose: "to insure that ... pension ... plans are operated for the welfare of employees in general, and to prevent the trust device from being used for the benefit of shareholders, officials, or highly paid employees...."This is not to say, of course, that the employees' trust fund established by private respondent is a device calculated to unserve its purpose and serve tax evasion. Unquestionably, the trust fund was created in good faith. It is meant as it was intended to mean — for the employees' welfare.But wanting are sufficient data which would justify this Court to make a conclusive statement that the trust qualifies under Section 56 (b) as it was inserted into the Tax Code by Republic Act 1963. The only written evidence of record of the creation of the pension trust is the minutes of the board of directors' meeting of March 14, 1949, the pertinent portion of which reads:3. Upon motion duly seconded, the following resolution was unanimously passed: RESOLVED, that the sum of FOUR HUNDRED FIFTEEN THOUSAND PESOS (P415,000.00) be appropriated from the surplus of the company arising from prewar operations in order to cover the payments of backpay and payment of reasonable compensations to those persons who have materially aided the Company in its Organization and Rehabilitation and in the preparation and prosecution of the Company's claims. This appropriation shall cover a reserve fund for pensions for all the present and future employees of the firm in the amount of SIXTY THOUSAND PESOS (P60,000.00), Reserve Fund for Employees' Welfare to the amount of FIFTY THOUSAND PESOS (P50,000.00). Reserve Funds for Medical Hospitalization, etc. to the amount of THIRTY THOUSAND PESOS (P30,000.00). Reserve Fund for Insurance and Accident to the amount of TWENTY FOUR THOUSAND PESOS (P24,000.00) and a Reserve Fund for Bonuses Payable to the amount of FIFTY THOUSAND PESOS (P50,000.00).4. Upon motion by Mr. Jesus Moraza, duly seconded by Mr. Juan Coromina, it was resolved further that the committee consisting of Dr. Mamerto Escano, as Chairman and Messrs. Gil Garcia and

Salvador E. Sala as members be constituted, as it is hereby constituted, to study the details of all the above resolutions and give effect thereto. The said committee is hereby empowered to immediately put into effect the above resolutions.We have the admitted fact also that every month thereafter an amount has been set aside for the fund and the investment thereof in stocks of San Miguel Brewery, Inc.And yet, something is amiss. For one, there is the admission made on page 3 of respondents' brief that:... It is, of course, admitted by the respondent Company that the strict requirements of Section 56 (b) of the Tax Code on the formation of employees' trust funds for pension had not been strictly complied with, although said funds and their returns are exclusively for the benefit of respondent Company's employees.And then, nothing extant in the record will show a pension plan actuarially sound. Correctly did the Court of Tax Appeals find that "[i]t does not appear, however, that said pension trust was created in accordance with the provision of Section 56 (b) of the Revenue Code."21The absence of such plan prevents us from taking a view which fits the purpose of the statute. Coming into play then is the specific provision in paragraph (a), Section 56, heretofore transcribed, which directs that the "taxes imposed by this Title upon individuals shall apply to the income ... of any kind of property held in trust." For which reason, the income received by the employees' trust fund from January 1, 1957 is subject to the income tax prescribed for individuals under Section 21 of the Tax Code.To follow a different construction would run "smack against the familiar rules that exemption from taxation is not favored,22 and that exemptions in tax statutes are never presumed,"23 and these "are but statements in adherence to the ancient rule that exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority."243. Having reached the conclusion that the assessment made by petitioner and the ruling of the Court of Tax Appeals on lack of income tax liability were on a mistaken premise, but that the trust established by respondent should pay the taxes imposed upon individuals, we are now faced with the mechanics of tax collection.The problem of prescription comes in. By Section 331 of the Tax Code, internal revenue taxes shall be assessed within five years after the return is filed. Here, no return was filed upon a belief in good faith that no tax liability attaches. Add to this the fact that the Commissioner of Internal Revenue made an assessment of income tax but upon the mistaken assumption that the tax payable was upon the basis of a corporate tax and not individual tax, and the picture is complete. Good faith in one, and honest mistake in the other. Both petitioner and respondent company are on the same footing. It is because of this that we rule that Section 332 (a) of the Tax Code finds application. It reads: SEC. 332.Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission.Assessment should have as starting point the known figures. From 1953 to 1958, the following amounts were dividends received on the San Miguel Brewery, Inc. investment:1953 ................................... P4,430.001954 ................................... 4,384.001955 ................................... 6,240.001956 ................................... 8,000.001957 ................................... 8,009.601958 ................................... 7,999.20As far as we could read from the record, on the 1953 to 1956 dividends, payments under protest were made as follows:1. Deficiency franchise tax .................................. P468.142. 25% surcharge .................................................. 117.043. Compromise penalty ........................................ 50.00Total ............................................ ________________________________________P635.18On the 1957 dividends, the following were paid under protest:1. Deficiency franchise tax .................................. P166.852. 25% surcharge .................................................. 41.713. Compromise ...................................................... 10.00Total ............................................ ________________________________________P218.56The 1958 dividends were included in the franchise tax return for the first quarter of 1959, the tax for which was paid on April 16, 1959.In the determination of the taxes due, the 50% surcharge sought by petitioner should not be included. To subject a taxpayer to the payment of 50% surcharge provided for in Section 72 of the National Internal Revenue Code, the State must show either that there was a wilful neglect to file a return or that a case of a false or fraudulent return wilfully made exists. There is total absence of proof, and petitioner does not allege, that respondent company wilfully neglected to

file a return or that it made a false or fraudulent return. In fact, this Court's pronouncement was necessary to determine whether such dividends are taxable at all, and if so, under what law. In Yutivo Sons Hardware Company vs. Commissioner,25 our ruling is that where a man "honestly believes" that the method employed by him in computing his tax liability is correct, he does not incur any fraud; in which case, no fraud penalty attaches under Section 72 of the Tax Code, which in part reads:SEC. 72.Surcharges for failure to render return and for rendering false and fraudulent returns. —... In case of wilful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is wilfully made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax....Absent the specifics exacted in Section 72, no 50% surcharge is collectible.4. Was respondent company late in the payment of its franchise taxes?We first go to the controlling statutes. Section 259, paragraph (2) of the National Internal Revenue Code reads:SEC. 259.Tax on corporate franchises. — ....The taxes, charges, and percentages on corporate franchises, shall be due and payable as specified in the particular franchise, or in case no time limit is specified therein, the provisions of section one hundred and eighty-three shall apply; and if such taxes, charges, and percentages remain unpaid for fifteen days from and after the date on which they must be paid, twenty-five per centum shall be added to the amount of such taxes, charges, and percentages, which increase shall form part of the tax.26Section 183 (a) mentioned in Section 259 of the same Code in turn partly reads: SEC. 183.Payment of percentage taxes.— (a) In general. — It shall be the duty of every person conducting a business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings, or gross value of output actually removed from the factory or mill warehouses and within twenty days after the end of each month, pay the tax due thereon:....Upon the other hand, the company's franchise provides:... Said percentage shall be due and payable quarterly.The quintessence of petitioner's argument is that the phrase "due and payable quarterly" in the franchise of the company means that the tax is immediately demandable at the end of each calendar quarter; and that since the franchise itself sets the time limit for the payment of the franchise tax, Section 183 just quoted finds no application. In which case, so petitioner avers, the 25% surcharge would be collectible if the percentage taxes remain unpaid after fifteen days from the end of each calendar quarter.Decisive of the question is the meaning of the term "due and payable quarterly." Resort to the following definitions may help in clearing up the issue:(1) The word "due" is only equivalent to or synonymous with "payable."27(2) The word "due" with reference to taxes, implies that such taxes are then "owing, collectible or matured."28(3) "The word 'due' in one sense means that the debt or obligation to which it is applied has by contract of operation of law become immediately payable, but in another sense it denotes the existence of a simple indebtedness, without reference to the time of payment, in which it is synonymous with 'owing' and includes all debts whether payable in praesenti or in futuro."29(4) "Unless context clearly indicates a contrary meaning, the phrase 'due and payable' on a specified date means the debt or obligation to which it is applicable is then immediately payable."30In line with the foregoing definitions, the term "due and payable on the first day of each month" was interpreted to mean that payment on any day during the month other than the first day would constitute non-compliance.31In our opinion, the term "due and payable quarterly" in this case merely indicates the frequency of payment of the franchise tax, viz., very three months. It does not refer to the time limit or, in the precise language of Section 259, "the date on which they (the taxes) must be paid." Under Section 183(a) in relation to Section 259, second paragraph, the law has opted to collect the tax within twenty days after it becomes due and payable, namely, the last day of each quarter. The time limit or the date on which the percentage tax must be paid by the company is the twentieth day after the last day of each quarter. Section 259 grants another grace period of fifteen days from the termination of this time limit before imposing the 25% surcharge.To say that Section 183(a) is not applicable simply because, as amended, it provides for monthly payment while the company's charter speaks of quarterly payment, is to hang so heavy a meaning on too slender a frame. Prior to its amendment by R.A. 1612 on August 24, 1956, said Section 183(a) prescribed quarterly payment of percentage taxes.32 Accurately read, the amendment merely changed the manner or frequency of payment of the tax, whereas Section 259 makes reference to Section 183(a) with respect to the time limit for payment of percentage taxes. The amendment does not nullify the applicability of Section 183(a) to franchises which do

not set any time limit for payment although providing for a different manner or frequency of payment. Common sense dictates that it be so. For, if the law has chosen to allow a fifteen-day grace period to taxpayers paying every month, no cogent reason exists why the same period — if not longer — should be denied taxpayers paying every three months. The latter require more time for preparation — their return covers a longer period. The tax court is correct.33Really, the tax cannot be immediately demandable at the end of each calendar quarter. Reason for this is that transactions on the last day of the quarter must have to be included in the computation of the taxpayer's return for each particular quarter. It is well-nigh impossible for the taxpayer to add up his income, write down the deductions, and compute the net amount taxable as of the last working hour of the last day of the quarter, and at the same time go to the nearest revenue office, submit the quarterly return and pay the tax. This accounts for the fact that Section 183(a) of the National Internal Revenue Code gives the taxpayer a leeway of twenty days after the end of each quarter to do all of these. And by Section 259, it is only upon failure to pay for fifteen days "from and after the date on which they must be paid" that the twenty-five per centum shall be added to the amount of "taxes, charges, and percentages," on corporate franchises. Statutes are not to be so narrowly read as to beget unreasonableness.We accordingly rule that the franchise tax "must be paid" within "twenty days after the end" of each quarter and that if such tax remains unpaid for 15 days "from and after the date on which they must be paid," then twenty-five per centum shall be added to the amount due. No surcharge for late payment of respondent company's franchise taxes accrues.For the reasons given —The judgment under review is hereby AFFIRMED insofar as it reverses petitioner's assessment of surcharge for late payment of respondent company's franchise tax;34 and Said judgment is hereby REVERSED insofar as it exempts respondent company from the payment of deficiency income tax, in the sense that respondent company, in its capacity as fiduciary of its employees' reserve fund, is hereby declared liable for the payment of individual income tax set forth in Section 56(a) in connection with Section 21 of the National Internal Revenue Code; and Conformably to the opinion expressed herein, let the record of this case be returned to the Court of Tax Appeals with instructions to hear and determine the tax liability of the trust known as "Employees' Reserve for Pensions" and/or tax refund, if any, to respondent Visayan Electric Company, upon the dividends received during the years 1953 to 1958 on the investment of its employees' reserve fund for pensions, and tax payments made by reason thereof, said tax to be computed in accordance with Section 56(a) and (c) of the National Internal Revenue Code in relation to Section 21 of the same Code.No costs. So ordered.Republic of the PhilippinesSUPREME COURTManilaEN BANCMay 29, 1953G.R. No. L-4433SALUD PATENTE, demandante-apelada, vs.ROMAN OMEGA, demandado-apelante.Sres. Roman Duterte, Cecilio Gillamac, Antolin Rubillos y Gaudioso Montecillo en representacion del apelante.D. Victorino C. Teleron en representacion de la apelada.PABLO, J.:Tratase del cobro de un pagare redactado como sigue:Villaba, Leyte, August 24, 1949.This is to acknowledge receipt of the sum of One Thousand Six Hundred Pesos (P1,600) from Salud Patente, Filipino citizen, of age, single, also a resident of Villaba, Leyte, like myself, as my indebtedness to her. I am going to pay debt to her, her heirs, assigns and successors, in the said sum of P1,600 in Philippine currency, as soon as possible or as soon as I have money.This debt is not covered by any security because of the intimate relations of my family to her.This sum covers my previous indebtedness to her which I received from her on May 4, 1947 and previous thereto.I hereby certify that I have to pay this whole indebtedness to her, before I exercise my right of repurchase of an agricultural land, situated in Tag-alang, Villaba, Leyte, bearing Tax No. 2662, which I sold to her under a pacto de retro sale.El Juez de Paz dicto sentencia ordenando el pago de la deuda dentro del termino de cuatro meses a contar desde la fecha de su promulgacion, con costas.En la vista de la causa en el Juzgado de Primera Instancia de Leyte, ante el cual dicha causa fue elevada en apelacion, ambas partes presentaron un convenio de hechos del tenor siguiente:

That, upon the face of the promissory note in question, it is apparent that no definite term is fixed therein and that its performance is left to the will of the debtor-defendant. (Rec. on Appeal p. 9)That the questions involved in the present action are purely questions of Law; viz.:(a) Whether or not the Justice of the Peace of Villaba, Leyte, had jurisdiction to take cognizance of the present case and to fix a definite term for the payment of the indebtedness in question by the defendant by applying the provisions of article 1128 of the Civil Code;(b) Whether or not, the Court of First Instance has, consequently, an appellate jurisdiction in the present action; (Rec. on Appeal, pp. 9-10)y el Juez, declarando que la obligacion es pura e incondicional, dicto decision a favor de la demandante ordenando el pago de la deuda con interes y costas.El demandao apelo directamente ante este Tribunal.Segun el convenio de hechos sometido por las partes, la cuestion a resolver es la siguiente: si el plazo del pago se ha dejado a voluntad del deudor, como en efecto asi significa la condicion de pago "as soon as possible or as soon as I have money," "es nula la condicion?El articulo 1115 del Codigo Civil dispone que "Cuando el cumplimiento de la condicion dependa de la exclusiva voluntad del deudor, la obligacion condicional sera nula." Debe ser nula y de ningun valor porque, de cumplirse la voluntad del deudor, seria imposible la cobranza el ilusorio el derecho de la acreedora. Declarada nula la condicion, ¿debe declararse tambien la obligacion pura e incondicional?Creemos que no.Si, por inadvertencia o ignorancia, las partes convinieron en una condicion de pago contraria a la ley, ¿por que al quedar anulada la condicion, se ha de convertir la obligacion principal en pura — exigible inmediatamente — cuando su intencion original era conceder al deudor plazo para el pago? Declarar pura la obligacion es imponer un criterio completamente distinto de lo convenido; debe determinarse otro plazo compatible con la ley y la voluntad de las partes, y es evidente que la nueva condicion no debe depender solamente de la acreedora: es tan injusto dejarla a la exclusiva voluntad del deudor como dejarla a la sola discrecion de la acreedora. Un tercero debe determinar ese plazo, teniendo en cuenta las cirnstancias bajo las cuales se concedio el prestamo. Por eso el articulo 1128, inspirado en un verdadero sentido de justicia, dispone que "si la obligacion no senalare plazo, pero de su naturaleza y circunstancias se dedujere que ha querido concederse al deudor, los tribunales fijaran la duracion de aquel. Tambien fijaran los tribunales la duracion del plazo cuando este haya quedado a voluntad del deudor."El articulo 1115 esta intimamente relacionado con el articulo 1128 del Codigo Civil, supliendo este la deficiencia del contrato, causada por la anulacion de la condicion de pago por disposicion expresa del articulo 1115. Comentando el articulo 1128, Manresa dice:El supuesto del primer parrafo de este articulo, aunque parecido, segun ya indicamos, a la limitacion, que suele tener en su eficacia la inmediata exigibilidad de las obligaciones puras, es, sin embargo, distinto: alli no hubo en la obligacion proposito de conceder plazo, pues en tal caso no seria pura; aqui, por el contrario, tal proposito existe. Por eso en el primer caso no se limita la exigibilidad por el acreedor, sino que se facilita el cumplimiento por el deudor; y en cambio, en el segundo, como hay un verdadero plazo, aquella exigibilidad aparece limitada.El segundo parrafo de este articulo expresa, comparado con el 1115, la diferente importancia del plazo y de la condicion. Esta no puede quedar a la voluntad del deudor, porque efecta la existencia de la obligacion misma; aquel si, porque su influencia no llega a tanto, y para evitar que, en definitiva, la obligacion contraida resultara ineficaz por no cumplirse nunca, queda la fijacion de limite confiada a la discrecion judicial.En apoyo de la teoria de la apelada de que, anulada la condicion que depende exclusivamente de la voluntad del deudor, queda exigible el pago inmediato, se cita la decision en Osmeña contra Rama, dictada en 9 de septiembre de 1909 bajo la ponencia del Magistrado Johnson, que en parte dice asi:. . . Se dijo en el acto de la vista del asunto en esta Corte, que en el reconocimiento del al deuda, antes transcrito, hecho por la demandada, esta habia impuesto la condicion de que pagaria la obligacion si consequia vender su casa. Si esta manifestacion en su reconocimiento de la deuda pudiera considerarse como una condicion, ella dependeria exclusivamente de su voluntad y era por tanto nula. (Art. 1115, Cod. Civ.)El reconocimiento, por tanto, era un reconocimiento absoluto de la obligacion, y suficiente para impedir la prescripcion de la accion fundada en el contrato original" (14 Jur.Fil., 99.)Pero en Eleizegue contra Manila Lawn Tennis Club, el Presidente Arellano, como ponente, dijo:Tampoco es posible concluir que ha de quedar completamente a merced del arrendatario la terminacion del contrato porque se haya estipulado la duracion a voluntad del mismo.El Codigo Civil ha previsto este caso en todo genero de obligaciones. Al tratar de las obligaciones a plazo en general, ha llenado el vacio de la anterior legislacion, en cuanto a "la duracion del plazo, cuando este haya quedado a voluntad del deudor," y preceptua que los tribunales la fijen en este caso. (Art. 1128, parrafo 2.) En todo contrato, como sientan los tratadistas, hay siempre un acreedor que es el que tiene derecho de exigir la prestacion y un deudor que tiene la obligacion de cumplir la prestacion. En los contratos bilaterales, las partes contratantes son mutuamente acreedores y deudores: asi en este contrato de arrendamiento, el arrendatario es

acreedor en cuanto a las prestaciones resenadas en el articulo 1554, y deudor en cuanto a las detalladas en el 1555 y 1561. El plazo para cumplir esta ultima obligacion es el que ha quedado a voluntad del deudor. Este plazo es el que debe ser fijado por los tribunales.La accion unica posble, segun terminos del contrato, es la encaminada a que por el Juez se determine este plazo, (2 Jur. Fil., 325.)En Levy Hermanos contra Paterno, bajo la ponencia del Magistrato Mapa, este Tribunal dijo:Habiendose obligado el demandado a pagar su deuda a los demandantes paulatinamente segun consta en el vale de autos, es visto que tal obligacion es a plazo, puesto que ni puede ser exigido su cumplimiento desde luego, ni depende tampoco la existencia de la misma de la realizacion de algun acontecimiento eventual. Mas, con ser dicha obligacion a plazo, no tiene sin embargo senalado dia cierto para su cumplimiento, resultando de ello que se trata de un plazo indeterminado, o cuya duracion no ha sido fijada por las partner al celebrar el contrato. Es ademas claro que el plazo resulta concedido a beneficio exclusivo del damandado y a propia comodidad del mismo, puesto que atendidos los terminos del vale no ganan nada los demandantes con la no inmediata exigibilidad de la obligacion. Ni siquiera hay pactado intres alguno de la deuda durante el tiempo que pudiera tardar el demandado en efectuar el pago de la misma. Por tal motivo, y de cualquier modo que se considere el caso, es indudablemente que cae bajo la prevision del articulo 1128 del Codigo Civil . . .:Manifiestamente deficiente la obligacion de autos en cuanto al senalamiento de la duracion del plazo que en ella se concede sin el menor genero de duda en favor del deudor, o sea del demandado, debe ser suplida esa deficiencia mediante la decision judicial que determine dicha duracion en uso de la facultad expresamente otorgada a los Tribunales, para tal efecto, por la disposicion legal que se acaba de trascribir. Obro por tanto el Juez con arreglo a derecho al ajercer dicha facultad en el presente caso fijando la duracion del plazo bajo la base de haber de hacerse el pago de la deuda a razon de P200 mensuales. Y no vemos ciertamente abuso de discrecion judicial en el senalamiento de semejante cuota, dada la importancia de la obligacion y la ausencia de toda estipulacion de interes a favor de los acreedores.(18 Jur.Fil., 357.)En Seoane contra Franco, siendo ponente el Magistrado Moreland, este Tribunal dijo:De estas decisiones resulta evidente que el documento enjuiciado el caso que nos ocupa es uno en que se deja el plazo del pago a voluntad del deudor hipotecario. Siendo este el caso, debio haberse entablado accion al objeto de senalar la fecha en que la obligacion debia vencer y ser pagadera. Hasta que se hubiera promovido tal accion no cabia iniciar pleito para recuperar la cantidad mencionada en el instrumento. Resulta, por tanto, evidente, que la accion era premature. El documento debio haber sido enjuiciado antes de su vencimiento. Por tanto debe sobreseerse la accion.De ordinario, cuando se sobresee una accion de esta indole el demandante puede en seguida promover pleito al objeto de fijar la fecha en que la escritura ha de vencer. . . .(24 Jur.Fil., 320)En Yu Chin Piao contra Lim Tuaco, bajo la ponencia del Magistrado Moreland, se reitero por cuarta vez la doctrina adoptada en las decisiones anteriores que "Cuando un contrato de arrendamiento no estipula plazo alguno sino que de la naturaleza del mismo y de las circunstancias puede deducirse que el plazodel arrendamiento queda a discrecion del arrendatario, o cuando la facultad de fijar dicho plazo reside unicamente en el arrendatario, los triubnales fijaran su duracion." (33 Jur.Fil., 98)Y en Gonzales contra De Jose, los dos pagares en litigio disponian que la deuda era pagadera "as soon as possible". Resolviendo la contienda, este Tribunal, por medio del Magistrado Imperial, dijo:It is practically admitted by the parties that the obligations arising from the two promissory notes should be governed by said article, (Art. 1128, Civ. Code) inasmuch as it was the intention of the plaintiff, evidenced by the terms of the said notes, to grant the debtor a period within which to pay the debts. . . . The defendant contends that art. 1113 of the Civil Code should be applied inasmuch as the obligations derived from the promisory notes were demandable from the time of their execution, . . .We hold that the two promissory notes are governed by art. 1128 because under the terms thereof the plaintiff intended to grant the defendant a period within which to pay his debts. As the promissory notes do not fix this period, it is for the court to fix the same. (66 Phil., 369)Despues de considerar con deternimiento las cinco decisiones citadas y la de Osmena contra Rama, concluimos que cuando el plazo del pago de una obligacion se deja a la exclusiva voluntad del deudor, procede anular esa condicion; pero su anulacion no convierte la obligacion en simple e incondicional; el recurso del acreedor en tal caso es acudir al tribunal para pedir la fijacion del plazo del de pago.Que el Juez de Paz de Villaba, Leyte, tiene jurisdiccion sobre la presente causa no cabe la menor duda, pues la demanda no reclama mas que el pago de la cantidad de P1,600: el Juzgado de Primera Instancia de Leyte, por tanto, tiene tambien jurisdiccion apelada.Como la demandante reclama el pago de la obligacion sin haber antes obtenido del juzgado la fijacion del plazo de pago, la presentacion de su demanda es prematura. (Seoane contra Franco, supra)Se revoca la decision apelada con costas contra la demandante-apelada.

Tuason, Montemayor, Jugo y Labrador, MM., estan conformes.THIRD DIVISION[G.R. No. 131784. September 16, 1999]FELIX L. GONZALES, petitioner, vs. THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by ELENA C. TALENS, respondents.D E C I S I O NPANGANIBAN, J.:If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised. Hence, an obligation to purchase cannot be implemented unless and until the sellers have shown their title to the specific portion of the property being sold.The CaseBefore us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision [1] of the Court of Appeals [2] in CA-GR CV No. 303754, which disposed as follows:“WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender possession of the property covered by the Contract of Lease/Purchase to the appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the following amounts:1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have recovered possession of the property subject of the Contract of Lease/Purchase;2. P15,000.00 as attorney’s fees; and3. Costs of suit.” [3]On the other hand, the trial court [4] Decision, [5] which was reversed by the CA, ruled as follows:“WHEREFORE, premises considered, this Court hereby renders judgment in favor of the defendant, Felix Gonzales, and against the plaintiffs, as follows:(1) Ordering the dismissal of the case;(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and the other sum of P10,000.00 as and for attorney’s fees; and(3) To pay the costs.” [6]The FactsWe hereby reproduce, unedited, the Court of Appeals’ summary of the facts of this case as follows:“On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. Victoria, Leticia C. Salvador and Elena C. Talens, entered into a Contract of Lease/Purchase with the defendant, Felix L. Gonzales, the sole proprietor and manager of Felgon Farms, of a half-portion of a ‘parcel of land containing an area of 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town, Province of Rizal’ and covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157, Records). The contract of Lease/Purchase contains the following provisions:‘1. The terms of this Contract is for a period of one year upon the signing thereof. After the period of this Contract, the LESSEE shall purchase the property on the agreeable price of One Million Pesos (P1,000,000.00) payable within Two (2) Years period with an interest of 12% per annum subject to the devalued amount of the Philippine Peso, according to the following schedule of payment:Upon the execution of the Deed of Sale 50% - and thereafter 25% every six (6) months thereafter, payable within the first ten (10) days of the beginning of each period of six (6) months.‘2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1, 1983.x x x x x x x x x‘9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.x x x x x x x x x’(Exhibits A, A-1; pp. 157-158. Records)’“The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on the half-portion of the property covered by Transfer Certificate of Title No. 12111 in accordance with the second provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and thereafter took possession of the property, installing thereon the defendant Jesus Sambrano as his caretaker (pp. 16-17, 27, TSN, December 12, 1989). The defendant Gonzales did not, however, exercise his option to purchase the property immediately after the expiration of the one-year lease on November 30, 1984 (pp. 19-20, TSN, September 14, 1989). He remained in

possession of the property without paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.) and without paying any further rentals thereon (p. 36, TSN, November 7, 1989).“A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing him of the lessors’ decision to rescind the Contract of Lease/Purchase due to a breach thereof committed by the defendant (Exhibit C; p. 162, Records). The letter also served as a demand on the defendant to vacate the premises within 10 days from receipt of said letter (Ibid.).“The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2, Record). The matter was therefore brought before the barangay captain of San Isidro, but owing to the defendant’s refusal to appear before the barangay, a certification allowing the case to be brought to Court was issued on March 18, 1987 (Exhibit E; p. 165, Records).“The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14, 1989).“A final demand letter to vacate the premises was sent by the remaining lessors who are also the heirs of the deceased lessor Paula Año Cruz, through their counsel on August 24, 1987 which the defendant Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).“The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the name of the plaintiffs’ predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p. 160, Records).“Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint for recovery of possession of the property - subject of the contract with damages, both moral and compensatory and attorney’s fees and litigation expenses (p. 3, Records).“Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only P50,000.00 of the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987 praying for a dismissal of the complaint filed against him and an award of moral, exemplary and actual damages, as well as litigation expenses (pp. 19-22, Records).“The defendant Sambrano was, upon motion, declared in default for failure to file an answer despite valid service of summons (p. 30, Records).“The parties limited the issues to be resolved to:(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to pay the down payment;(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records)“After the termination of the pre-trial conference, the trial court proceeded to hear the case on the merits and arrived at its appealed decision based on the following findings and conclusions:‘Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a Transfer Certificate of Title in the name of the lessee within 4 years before a new contract is to be entered into under the same terms and conditions as the original Contract of Lease/Purchase. Thus, before a deed of Sale can be entered into between the plaintiffs and the defendant, the plaintiffs have to obtain the Transfer Certificate of Title in favor of the defendant. Article 1181 of the New Civil Code states that: ‘In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.’ When the obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against him unless the condition is complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs. Philippine Trust Co., 68 Phil. 48).‘The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code states that: ‘The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment of the obligation, with the payment of damages in either case. He may seek rescission, even after he has chosen fulfillment, if the latter should become impossible x x x.’ The power to rescind is given to the injured party. Where the plaintiff is the party who did not perform, he is not entitled to insist upon the performance of the contract by the defendant or recover damages by reason of his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An action for specific performance of a contract is an equitable proceeding, and he who seeks to enforce it must himself be fair and reasonable, and do equity (Seva vs. Berwin, 48 Phil. 581). In this case, plaintiffs failed to comply with the conditions precedent after 2-1/2 years from the execution of the contract so as to entitle them to rescind the contract. Although the contract stated that the same be done within 4 years from execution, still, the defendant has to be assured that the land subject of the case will be transferred in his name without any encumbrances, as the Extra-Judicial Partition dated July 17, 1989 was being processed, and continues to be in process to this date. The failure to secure the Transfer

Certificate of Title in favor of the defendant entitles not the plaintiffs but, rather, the defendant to either rescind or to ask for specific performances.‘Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil Code states that:If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687. The other terms of the original contract shall be revived.‘Article 1682 of the New Civil Code states that:The lease of a piece of rural land, when its duration has not been fixed, is understood to have been made for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years may have to elapse for the purpose.‘The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial demand on July 2, 1986. The contract was entered into on December 1, 1983. The demand was thus made more than a year and a half from the expiry date of the original lease considering that there was no payment made for the second year of the lease. If one has to consider the fact that the defendant was given the option to purchase the property after two years, then, the lease would presumably run for at least two years. If that is so, then, the demand was made seven months after the expiration of the two-year lease. Still, this demand by the plaintiffs will come under the implied new lease of Articles 1682 and 1670 so that the plaintiffs are not entitled to terminate the Contract of Lease.‘In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify the defendant in due time of their intention to that effect. Nor can they rescind the Contract of Purchase in view of the fact that there is a condition precedent which the plaintiffs have not fulfilled. It is the defendant now who has the option to either rescind or demand the performance of the contract. Moreover, according to Article 1654 of the New Civil Code, the lessor is obliged to deliver the thing which is the object of the contract in such condition as to render it fit for the use intended. Considering that the lessors-plaintiffs have not delivered the property in whole over the protest of the defendant, the latter suffered damages therefor.’ (p. 4-6, Decision; pp. 262-264, Records)“Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having committed the following errors:ITHE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS COULD NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT (EXHIBIT ‘A’) AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM DEFENDANTS-APPELLEES.IITHE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)“The case was submitted for decision without the appellee’s brief as per the Court’s resolution dated July 8, 1992 (p. 71, Rollo).”Ruling of the Court of AppealsThe Court of Appeals reversed the trial court in this wise:“The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase to mean that before the appellee exercises his option to purchase the property by paying the 50% plus interest on the P1,000,000.00 purchase price, the appellants must first transfer the title to the property in the appellee’s name. The Court finds this interpretation of the provision strained if not altogether absurd. The transfer of title to the property in the appellee’s name cannot be interpreted as a condition precedent to the payment of the agreed purchase price because such interpretation not only runs counter [to] the explicit provisions of the contract but also is contrary to the normal course of things anent the sale of real properties. The terms of the contract [are] explicit and require no interpretation. Upon the expiration of the lease, the lessee shall purchase the property. Besides, the normal course of things anent the sale of real properties dictates that there must first be payment of the agreed purchase price before transfer of title to the vendee’s name can be made.“This was precisely what the appellants and Paula Año Cruz had in mind when they had the ninth provision incorporated in the Contract of Lease/Purchase. They had asked for a period of 4 years from the time they receive the downpayment of 50% within which to have [the] title to the property transferred in the name of the appellee. The reason for this four (4) year period is [that] title to the property still remains in the name of the original owners, the predecessors-in-interest of the herein appellants and [transferring] the title to their names and eventually to the lessee-purchaser, appellee herein, would take quite some time.“The appellee wanted to have the title to the property transferred in his name first before he exercises his option to purchase allegedly in accordance with the ninth provision of the contract.

But the ninth provision does not give him this right. A reading of the contract in its entirety shows that the 4 year period asked for by the appellants within which to have title to the property transferred in the appellee’s name will only start to run when the appellee exercises his option to purchase. Since the appellee never exercised his option to purchase, then appellee is not entitled to have the title to the property transferred in his name.”Attributing reversible errors to the appellate court, petitioner elevated the case to this Court. [7]The IssuesIn his Memorandum, [8] petitioner submits the “following main issues”:“I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of discretion in the interpretation of [the] law between the parties.“II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which resulted [in] departing from the usual course of judicial proceedings.”For these issues to be resolved, petitioner asks this Court to answer the following questions:“1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and that [in] paragraph No. 9 thereof?“2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could exercise his option to buy the property?“3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?”In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the Contract.The Court’s RulingThe Petition is meritorious.Main Issue: Interpretation of Paragraph NineIn its first paragraph, the disputed agreement provides that petitioner shall lease the property for one year, after which he “shall purchase” it. Paragraph nine, on the other hand, requires herein respondents to obtain a separate and distinct Transfer Certificate of Title (TCT) over the property, viz.:“9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.”Alleging that petitioner has not purchased the property after the lapse of one year, respondents seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that he could not be compelled to purchase the property, because respondents have not complied with paragraph nine, which obligates them to obtain a separate and distinct title in their names. He contends that paragraph nine was a condition precedent to the purchase of the property.To be sure, this paragraph – and the entire agreement, for that matter -- is not a model of how a contract should be worded. It is an invitation to a litigation, as in fact the parties had to go all to way up to this Court to plead for a resolution of their conflict which is rooted in their failure to express themselves clearly. Small wonder, even the two lower courts gave contradictory understanding of this provision, thereby necessitating the intervention of the highest court of the land.Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial court held that this obligation was a condition precedent to petitioner’s purchase of the property. Since respondents had not performed their obligation, they could not compel petitioner to buy the parcel of land. The CA took the opposite view, holding that the property should be purchased first before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that respondents were obligated to procure a TCT in their names before he could be obliged to purchase the property in question.Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several meanings, it shall be understood as bearing that import most adequate to render it effectual. [9] Considering the antecedents of the ownership of the disputed lot, it appears that petitioner’s interpretation renders clause nine most effectual.The record shows that at the time the contract was executed, the land in question was still registered in the name of Bernardina Calixto and Severo Cruz, respondents’ predecessors-in-interest. There is no showing whether respondents were the only heirs of Severo Cruz or whether the other half of the land in the name of Bernardina Calixto was adjudicated to them by any means. In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the Contract of Lease/Purchase was executed, there was no assurance that the respondents were indeed the owners of the specific portion of the lot that petitioner wanted to buy, and if so, in what concept and to what extent.

Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their names. This was necessary to enable them to show their ownership of the stipulated portion of the land and their concomitant right to dispose of it. Absent any title in their names, they could not have sold the disputed parcel of land.It is a well-settled principle in law that no one can give what one does not have -- nemo dat quod non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer legally. [10]Because the property remained registered in the names of their predecessors-in-interest, private respondents could validly sell only their undivided interest in the estate of Severo Cruz, the extent of which was however not shown in the records. There being no partition of the estate thus far, there was no guarantee as to how much and which portion would be adjudicated to respondents.In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold. [11] In this case, the respondent could not deliver ownership or title to a specific portion of the yet undivided property. True, they could have intended to sell their hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific portion of the land to be segregated, identified and specifically titled. Hence, by the said Contract, the respondents as sellers were given a maximum of four years within which to acquire a separate TCT in their names, preparatory to the execution of the deed of sale and the payment of the agreed price in the manner described in paragraph nine.This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties was to have the title transferred first to respondents’ names as a condition for the completion of the purchase.In holding that clause nine was not a condition precedent to the purchase of the property, the CA relied on a literal interpretation to the effect that the TCT should be obtained in the name of the petitioner-vendee. It reasoned that the title could be transferred to the name of the buyer only after the completion of the purchase. Thus, petitioner should first purchase the property before respondents could be obliged to transfer the TCT to his name.We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: “The lessors x x x shall undertake to obtain a separate and distinct TCT xxx to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years x x x.” Read in its entirety, however, paragraph nine does not say that the TCT should be obtained in the name of the lessee. In fact, paragraph nine requires respondents to obtain a “TCT over the herein leased portion to the LESSEE,” thereby showing that the crucial phrase “to the LESSEE” adverts to “the leased portion” and not to the name which should appear in the new TCT.Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a separate TCT had been obtained, “a new contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.”If, as the CA held, petitioner should purchase the property first before the title can be transferred to his name, why should there be a waiting period of four years before the parties can execute the new contract evidencing the sale? Why should the petitioner still be required to pay rentals after it purchases and pays for the property? The Contract could not have envisioned this absurd scenario.Clearly, the appellate court’s literal interpretation of the first portion of paragraph nine renders the latter portion thereof ineffectual. In other words, that portion can only mean that the respondents should first obtain a TCT in their names, after which petitioner is given time to purchase and pay for the property.Respondents insist that “the obligation of petitioner to buy the disputed land immediately after the termination of the one year lease period is explicit.” [12] However, it is more reasonable to state that the first paragraph was effectively modified by the ninth. To repeat, petitioner can be compelled to perform his obligation under the first paragraph, only after respondents have complied with the ninth. Unless and until respondents have done so, the first paragraph cannot be enforced against petitioner.In sum, we hold that the ninth provision was intended to ensure that respondents would have a valid title over the specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to pay the sums stated in the Contract be enforced within the period stipulated. Verily, the petitioner’s obligation to purchase has not yet ripened and cannot be enforced until and unless respondents can prove their title to the property subject of the Contract.Secondary IssuesNinth Clause Was a Condition PrecedentBecause the ninth clause required respondents to obtain a separate and distinct TCT in their names and not in the name of petitioner, it logically follows that such undertaking was a condition precedent to the latter’s obligation to purchase and pay for the land. Put differently,

petitioner’s obligation to purchase the land is a conditional one and is governed by Article 1181 of the Civil Code. [13]Condition has been defined as “every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act.” [14] Without it, the sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property. “When the consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not perfected unless that condition is first complied with.” [15]The Court has held that “[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against him unless the condition is complied with.” [16] Furthermore, “[t]he obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event, so that if that event does not take place, the parties would stand as if the conditional obligation had never existed.” [17]In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents comply with the suspensive condition that they acquire first a separate and distinct TCT in their names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to purchase the land has not arisen.Respondents Cannot Rescind the ContractIn the same vein, respondents cannot rescind the contract, because they have not caused the transfer of the TCT to their names, which is a condition precedent to petitioner’s obligation. This Court has held that “there can be no rescission (or more properly, resolution) of an obligation as yet non-existent, because the suspensive condition has not happened.” [18]Since the reversal of the CA Decision is inevitable, the trial court’s judgment should be reinstated. However, we find no sufficient factual or legal justifications for the award of moral damages and attorney’s fees.WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET ASIDE. The Decision of the trial court is REINSTATED, but the award of moral damages and attorney’s fees is DELETED for lack of basis. No costs.SO ORDEREd

Republic of the PhilippinesSUPREME COURTManilaSECOND DIVISION G.R. No. L-33084 November 14, 1988ROSE PACKING COMPANY, INC., petitioner, vs.THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III), PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents.

PARAS, J.:This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated on December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing, this Court hereby renders judgment: 1. Denying the petition to set aside and annul the questioned orders dated January 31, 1969 and May 7,1969 rendered by respondent Judge, the same having been issued in consonance with the exercise of the Court's discretion. 2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of ownership over the properties sold at such sale to have been prematurely executed thereby rendering it void ab initio. 3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby granted sixty (60) days from receipt of a copy of this decision within which to redeem the properties sold at the foreclosure sale of May 9, 1969. 4. Dismissing the charge of contempt against PCIB and its Executive Vice-President and General Manager, Eugenio R. Unson,.for lack of merit. and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration. The facts of the case as presented by petitioner and as embodied in the decision of the Court of Appeals are as follows: On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the reactivation of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of P550,000.00 as wen as an application for a loan of P300,000.00, on

fully secured real estate and chattel mortgage and on the further condition that respondent PCIB appoint as it did appoint its executivevice-president Roberto S. Benedicto as its representative in petitioner's board of directors. On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly owned investment subsidiary of the Philippine National Bank, approved a P2.6 million loan application of petitioner with certain conditions. Pursuant thereto, the NIDC released to petitioner on November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels of land in Pasig, Rizal making a down payment thereon. On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966, the aforesaid releases totalling P200,000.00 were applied to the payment of preferred stock which NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme as per agreement. Thereafter, the NIDC refused to make further releases on the approved loan of petitioner.On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to petitioner consisting of a P710,000.00 loan for the payment of the balance of the purchase price of those lots in Pasig required to be bought, P500,000.00 loan for operating capital, P200,000.00 loan to be paid directly to petitioner's creditors, while consolidating all previous accommodations at P1,597,000.00—all of which were still secured by chattel and real estate mortgages. However, PCIB released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands and some P300,000.00 for operating capital. On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for a loan of P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making equipment. Immediately upon receipt of notice of the approval of the Development Bank of the loan, petitioner advised respondent PCIB of the availability of P800,000.00 to partially pay off its account and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all obligations should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela, Bulacan with the P800,000.00 DBP loan, with the latter's consent. On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its president for the collection of petitioner's indebtedness to respondent bank, which complaint was docketed as Civil Case No. 71697 of the Court of First Instance of Manila.On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at an auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff served notice of sheriffs sale (of the real properties mortgaged to respondent PCIB) on July 18,1968 at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta); T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin, Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case No. 11015 in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from proceeding with the foreclosure sale, to ask the lower court to fix a new period for the payment of the obligations of petitioner to PCIB and for other related matters. Petitioner likewise prayed, pending final judgment, for the issuance ex-parte of a writ of preliminary injunction enjoining herein respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968. On January 31, 1969, the lower court issued ail order denying the application for preliminary injunction and dissolving its restraining order which had been issued on July 17, 1968. Petitioner promptly filed a motion for reconsideration which was denied by the lower court on May 7, 1969. On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with application for a restraining order and preliminary injunction against the foreclosure sale (Rollo, p. 54).<äre||anº•1àw> On May 13, 1969 respondent Court resolved to issue a writ of preliminary injunction upon filing by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for amendment of the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969, praying instead that the preliminary injunction should now enjoin respondents, particularly respondent Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969; that said sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering the certificate of deed of sale in the Registry of Deeds; and to toll or stop the running of the period of redemption. Respondent Court resolved to deny said motion in its Resolution dated May 28, 1969 (Rollo, pp. 237-242). On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty (60) days from receipt of the decision to be rendered in CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one declaring the execution sale in dispute to be valid (Rollo, p. 231). Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R. Unson for and in behalf of respondent PCIB concerning the properties involved in the instant petition for certiorari, was registered with the Register of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently, the old transfer certificates of title covering the aforementioned properties were

cancelled and new ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view thereof, petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant General Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of Sale dated May 12, 1970 and the consolidation of ownership of the same date be declared null and void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176—be cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit the TCT Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243). On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249). On January 12, 1971 it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated January 5, 1971 (Rollo, p. 250) and on January 22, 1971 it again resolved (Rollo, p. 281) to deny petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p. 260). The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16, 1971. On February 23, 1971, the Court resolved to give due course to the petition and ordered the issuance of preliminary injunction enjoining respondents from enforcing or implementing the appealed decision of respondent Court of Appeals, upon petitioner's posting a bond of P50,000.00 (Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619).The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents was filed on September 20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971 (Rollo, p. 678). On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia legis, more specifically the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the motion on May 27, 1971 (Rollo, p. 712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983(Rollo, p. 752).The issues raised in this case are the following: 1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE LOWER COURT DID NOT COMMIT AN ABUSE OF DISCRETION IN DENYING PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for Petitioner, pp. 21-47); 2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID THE FORECLOSURE SALE ON MAY 9,1969 OF THE MORTGAGED PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE MORTGAGES EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 47-50).The main issue is whether or not private respondents have the right to the extrajudicial foreclosure sale of petitioner's mortgaged properties before trial on the merits. The answer is in the negative.Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain judgment (1) enjoining defendants (respondents herein) from proceeding with the foreclosure sale of the subject real estate mortgages, (2) fixing a new period for the payment of the obligations of plaintiff to defendant PCIB sufficiently long to enable it to recover from the effects of defendant PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual, compensatory and exemplary or corrective damages, aside from attorney's fees and expenses of litigation, plus costs (Rollo, p. 98). It is to be noted that petitioner filed the above case mainly to forestall the foreclosure sale of the mortgaged properties before final judgment. The issuance of a writ of preliminary injuction could have preserved the status quo of the parties in relation to the subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79 [1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969]. When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it had previously issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated the case before trial on the merits. While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was premature. First was the question of whether or not petitioner corporation was already in default. In its letter dated August 12,1966 to petitioner corporation, among the conditions that respondent bank set for the consolidation of the outstanding obligations of petitioner was the liquidation of the said obligations together with the latter's other obligations in the financing scheme already approved by the NIDC and PDCP. To quote:

a) These facilities shall be temporary and shall be fully liquidated, together with other obligations from a refinancing scheme already approved by the NIDC and PDCP totalling Pl million in equity and P2.6 million in long term financing. In this connection, the firm shall present to this Bank a certified copy of the terms and conditions of the approval by the NIDC and PDCP. (Brief for the Respondent, p. 41).In other words, the loans of petitioner corporation from respondent bank were supposed to become due only at the time that it receives from the NIDC and PDCP the proceeds of the approved financing scheme. As it is, the conditions did not happen. NIDC refused to make further releases after it had made two releases totalling P200,000.00 which were all applied to the payment of the preferred stock NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed (Gaite v. Fonacier, 2 SCRA 831 [1961]).<äre||anº•1àw>Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a complaint against petitioner and Rene Knecht personally for collection on petitioner's indebtedness (Brief for Petitioner, p. 13). For an obligation to become due there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already in default or not and whether demand had been properly made or not had to be determined in the lower court. Granting that the findings of the lower court after trial on the merits answer both questions in the affirmative, another question that had to be determined was the question of cause or consideration. The loan agreements between petitioner and respondent Bank are reciprocal obligations (the obligation or promise of each party is the consideration for that of the other Penacio v. Ruaya, 110 SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985] ). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of respondent bank to furnish the loan (Ibid.). Respondent bank had complete control of the financial affairs and the management of petitioner corporation. It appointed its executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors, giving him the position of

vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S. Benedicto as vice-president and member of the board of directors of petitioner corporation on December 29, 1965 (Brief for Petitioner, p. 8), respondent bank designated Rafael Ledesma as its representative in petitioner corporation's board of directors, due representation in the board of petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact, Rafael Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time comptroller-treasurer of the corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p. 41). On January 2, 1967, it also required petitioner to replace its then manager, the Management & Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma at a monthly salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by defendant's designated manager, no meeting of the board of directors of petitioner was called- Edmundo Ledesma exercised full control and management (Brief for Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank has not given up management of petitioner's food canning industry and continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied by respondent bank. Respondent bank's designation of its own choice of people holding key positions in petitioner corporation tied the hands of petitioner's board of directors to make decisions for the interest of petitioner corporation, in fact, undermined the latter's financial stability. During the 18 months of Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of canned goods which according to petitioner is only equivalent to its normal production in three weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring that petitioner at that time did not have sufficient capital to operate the factory, and that said factory was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167) earmarked for operating capital purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan at a higher interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p. 167). After the Development Bank of the Philippines had

approved on June 29, 1967 a loan of P1,840,000.00 applied for by petitioner in 1961, respondent bank informed of the availability of P800,000.00 to pay off partially petitioner's account with it and requested to release the titles of the Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's board of directors wrote a letter to the Development Bank of the Philippines stating that Rene Knecht, petitioner's president, had no authority to borrow for petitioner, being a mere figurehead president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13).<äre||anº•1àw> That Rafael Ledesma wrote a letter to the Development Bank of the Philippines is admitted by respondent bank (Rollo, p. 169). The Development Bank of the Philippines refused to make further releases on the approved loan or to issue the dollar guaranty for the importation of can making machinery. It was Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent bank that instituted the collection suit andextra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79).It is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying key positions therein. Not even the president of petitioner corporation could escape control by respondent bank through the Comptroller Treasurer assigned "to countersign all checks and other disbursements and decide on all financial matters regarding the operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41). There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing (Brief for Petitioner, pp. 3132) and such interference is only a consequence of respondent bank's management of petitioner corporation through the officers occupying key positions therein. Thus, if ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed to the mismanagement of respondent corporation through its representatives in petitioner corporation.In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180 [1986]) where the lending institution took over the management of the borrowing corporation and led that corporation to bankcruptcy through mismanagement or misappropriation of the funds, defeating the very purpose of the loan which is to develop the projects of the corporation, the Court ruled that it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. It cannot be determined at this point how much of the total loan, most especially the P500,000.00 loan for operating capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been mismanaged or misspent by respondent bank through its representatives. This matter should rightfully be litigated below in the main action (Filipinas Marble Corportion v. Intermediate Appellate Court. (supra).Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan agreement. By its own admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved on October 13, 1966 (Brief for Respondent, p. 44) in which case, petitioner corporation, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]). As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed to satisfy its total debt to respondent bank. (Central Bank of the Philippines v. Court of Appeals, supra.)The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not must be answered in the negative. The rule of indivisibility of a real estate mortgage refers to the provisions of Article 2089 of the Civil Code, which provides: Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.Therefore the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. Respondent bank cites the above-quoted article in its argument that the mortgage contract is indivisible and that the loan it secures cannot be divided among the different lots (Brief for Respondent, p. 27). Respondent Court upheld the validity of the sale en masse (Rollo, p. 246).The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does not obtain in this case (Central Bank of the Philippines v. Court of Appeals, supra.) Furthermore, granting that there was consolidation of the entire loan of

petitioner corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where there was failure of consideration on the part of respondent bank for the mismanagement of the affairs of petitioner corporation and where said bank is in default in complying with its obligation to release to petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is noted that as already stated hereinabove, the exact amount of petitioner's total debt was still unknown. PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it sustained: (a) the lower court's denial of petitioner's application for preliminary injunction and (b) the validity of the foreclosure sale; (2) the lower court is ordered to proceed with the trial on the merits of the main case together with a determination of exactly how much are petitioner's liabilities in favor of respondent bank PCIB so that proper measures may be taken for their eventual liquidation; (3) the preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease the real properties in custodia legis is DENIED. FIRST DIVISION

FRANCISCO GONZALES, G.R. No. 130403Petitioner,Present:PUNO, C.J., Chairperson,SANDOVAL-GUTIERREZ, - v e r s u s -

SEVERINO C. LIM and TOYOTA SHAW, INC.,Respondents.Promulgated: CORONA, AZCUNA and GARCIA, JJ.

July 30, 2007D E C I S I O NCORONA, J.:

At bar is an appeal by certiorari under Rule 45 of the Rules of Court questioning the decision [1] and resolution [2] of the Court of Appeals (CA) in CA-G.R. CV No. 41716 entitled Severino C. Lim and Toyota Shaw, Inc. v. Francisco Gonzales and Carmen Gonzales. The facts follow.

Petitioner Francisco Gonzales, Roque Ma. Gonzales and Carmen Gonzales (Gonzaleses) were the owners of Motown Vehicles, Inc. (Motown). Motown was the licensed distributor of Ford vehicles in the country. Its assets included two buildings standing on a 4,944 sq. m. lot leased from Tanglaw Realty Inc. (Tanglaw).

In 1988, when Ford Philippines ceased operations, the Gonzaleses sold Motown’s shares of stocks to respondents Severino C. Lim and Toyota Shaw, Inc. which was then putting up a Toyota car dealership. The “Agreement” signed by the parties stated that the sale included Motown’s two lease contracts with Tanglaw. It read:

WHEREAS, Motown, which owns these fixed and moveable improvements and equipments…does not own the land on which these improvements and equipments are located, but merely leases the bare land… from Tanglaw Realty Corp. under 2 Lease Contracts both dated June 17, 1978 both commencing Nov. 15, 1977 and expiring Nov. 14, 2002.

xxx xxx xxx

4. PAYMENT — The aforementioned price amounting to P6,746,000.00 shall be paid by [respondents] to the [Gonzaleses] in two (2) installments payable simultaneous to the occurrence of the following events:

1. P6,246,000 – [u]pon signing of this contract xxx

2. P500,000 – [u]pon receipt of official communication from Tanglaw Realty Corporation to the effect that Motown can have continuing and unhampered use of the pieces of [the leased] land…covered by the 2 Lease Contracts…[I]t is understood that the continuation of the lease at a reasonable rate for the original term of the 2 lease agreements is a central,

indivisible and very basic part of this agreement, since the [bases] for the valuation of Motown by [respondents are] its location and the improvements and equipments contained therein. [3]xxx xxx xxxAfter paying the initial installment of P6,246,000 to the Gonzaleses, respondents claimed they discovered that one of Motown’s lease contracts had already been terminated prior to the sale. As a result, they were allegedly constrained to negotiate with Tanglaw for a new lease contract (with a higher rental).

Subsequently, respondents filed a case in the Regional Trial Court (RTC), Branch 65 of Makati, [4] for declaratory relief with damages against the Gonzaleses, seeking release from their obligation to pay the P500,000 balance.

During the trial, respondents (as then plaintiffs) accused the Gonzaleses of falsely representing to them that the latter’s two lease contracts were still subsisting at the time of the sale. They maintained that the Gonzaleses guaranteed a “continuing and unhampered use” of the premises but Tanglaw had nonetheless threatened to evict them from one of the leased portions.

To support their claim, they presented in court a copy of the “Agreement” indicating the Gonzaleses’ alleged warranty that the two lease contracts with Tanglaw were still good.

Petitioner (with his then co-defendants) countered that respondents were well aware of the termination of one of the two lease contracts at the time of sale. He denied giving a warranty on both contracts and explained that he only signed the “Agreement” (showing Motown’s two lease contracts with Tanglaw) on prodding by respondents that they needed it to convince Toyota Philippines they were ready with their dealership site. According to petitioner, respondents told him it was only “for show” and amendments thereto would be made later on.

Petitioner added that his only undertaking was to help respondents negotiate a new lease contract that would have similar terms as his. As a counterclaim, petitioner asked for the payment of respondents’ P500,000 balance.

After trial, the RTC dismissed respondents’ case but granted petitioner’s counterclaim of P500,000. The court a quo’s decision read:

...[T]he court finds that [petitioner] did not warrant the existence of the lease on one of the premises. The court believes that even before the [“Agreement”] has been executed[,] [respondents were] already aware that one of the leases has been terminated…[I]f [petitioner] warranted anything at all, it was only that he will help [respondents] procure a new lease contract under the old term.

xxx xxx xxx

…In view of the foregoing, the complaint is DISMISSED[.] On the counterclaim, [respondents] are ordered to pay [petitioner] P500,000, representing the outstanding balance for the sale of Motown shares of stocks plus legal interest from October 10, 1989, the date of the lease between Tanglaw Realty and Toyota Shaw, Inc., when [petitioner] was deemed to have fulfilled his promise.xxx xxx xxxSO ORDERED. [5]

Respondents appealed to the CA which affirmed with modification the trial court’s decision. It agreed with the RTC that respondents could not feign ignorance of Motown’s terminated lease contract; however, it deleted the order directing respondents to pay petitioner P500,000. The CA ruled that the payment was not due since petitioner failed to obtain the required official communication from Tanglaw. The CA decision read:xxx xxx xxxxxx. The phrase “continuation of the lease contract at a reasonable rate” proves that [respondents] did not contemplate stepping into the shoes of Motown as lessee of the parcels of land because if what they truly expected was to continue exactly the same lease agreement between [Tanglaw] and Motown, there would have been no need to include [said] phrase… Clearly, [respondents] anticipated nay expected that if they continue the lease, it would not be under the same terms and conditions as the original contract, but rather at a new, reasonable rate. Therefore, there was no warranty from [petitioner]…

…[W]ith regard to the question of whether [respondents] are now obliged to pay [petitioner] the P500,000.00…, the Court finds that [petitioner had] not been able to fulfill [his] obligation to

submit the required official communication from Tanglaw Realty Corporation. Thus, [respondents] are…freed from their obligation to pay the final installment of P500,000.00.

xxx xxx xxxWHEREFORE, judgment is hereby rendered MODIFYING the lower court’s decision by deleting the portion ordering [respondents] to pay [petitioner] P500,000 plus legal interest. Instead, the Court hereby declares [petitioner’s] counterclaim DISMISSED. [6]

Petitioner filed a motion for reconsideration (MR), contending that the payment of the P500,000 balance was already due because respondents themselves had prevented him from fulfilling his undertaking in the “Agreement.” Petitioner insisted that since respondents negotiated directly with Tanglaw for a new lease contract, petitioner’s obligation should be deemed fulfilled.

The CA denied the MR. [7] Hence, this petition. [8]

In this petition, the lone issue for resolution is whether petitioner was still entitled to the payment of P500,000 despite failure to comply with the provision in the “Agreement” requiring him to obtain an official communication from Tanglaw regarding the continuation of Motown’s lease contract.

At the outset, petitioner’s undertaking set forth in the “Agreement” may be deemed a “condition,” a future and uncertain event upon which the existence of an obligation is made to depend or that which subordinates the existence of a liability under a contract to a certain future event. [9] It was a condition that was imposed on an obligation after the consummation of the contract of sale, not a condition on the perfection of the contract itself (non-fulfillment of which could have prevented the juridical relation from coming into existence).

Article 1545 of the Civil Code is pertinent:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the nonperformance of the condition as a breach of warranty. (emphasis supplied)xxx xxx xxxThese options were echoed in Romero v. CA, [10] where we declared that if the condition was imposed on an obligation of a party which was not complied with, the other party may either (1) refuse to proceed with the agreement or (2) waive the fulfillment of the condition.

In the case at bar, respondents obviously did not choose the first option as they proceeded with their contract with petitioner despite the latter’s non-fulfillment of the condition in the agreement. In fact, in their comment, they stated that they “took possession of the properties and caused extensive improvement and installed facilities and equipment” thereon. [11]

Did respondents, however, waive fulfillment of the condition? Yes.

The records reveal that respondents negotiated directly with Tanglaw for a new lease contract even without the required official communication that petitioner was supposed to obtain for them, a condition in the “Agreement” which they themselves imposed on the latter. Although they had the right to require his compliance with the condition or compel his performance of the undertaking, they opted otherwise.

Respondents’ assertion that they were merely forced to deal directly with Tanglaw because the latter had threatened to evict them has no merit. As the RTC and the CA both held, respondents, at the time of the sale, already knew that one of Motown’s two lease contracts with Tanglaw had been terminated. This being a finding of fact, we shall not look into it, absent any compelling reason to do so. [12] Respondents therefore cannot invoke this argument to justify their actions and evade their liability to petitioner.

Moreover, respondents’ contention that the condition did not preclude them from dealing with Tanglaw or that they were “to refrain from negotiating directly” [13] can only mean that they did not really expect petitioner to comply strictly and absolutely with it. Respondents’ conduct showed that they did not only disregard the condition but also placed petitioner in a position that his compliance was no longer necessary. We are thus constrained to rule that they had effectively waived compliance with the condition.

Finally, the condition was deemed waived when respondents forged their new lease contract with Tanglaw. [14]

WHEREFORE, the petition is hereby GRANTED. The assailed decision and resolution of the Court of Appeals in CA-G.R. CV No. 41716 are hereby SET ASIDE and the decision of the Regional Trial Court REINSTATED.

SO ORDERED.Republic of the PhilippinesSUPREME COURTManilaEN BANC

G.R. No. L-25885 January 31, 1972LUZON BROKERAGE CO., INC., plaintiff-appellee, vs.MARITIME BUILDING CO., INC., and MYERS BUILDING CO., INC., defendants, MARITIME BUILDING CO., INC., defendant-appellant. Ross, Salcedo, Del Rosario, Bito and Misa for plaintiff-appellee.C. R. Tiongson and L. V. Simbulan and Araneta, Mendoza and Papa for defendant Myers Building Co., Inc.Ambrosio Padilla Law Offices for defendant-appellant Maritima Building Co., Inc.

REYES, J.B.L., J.:pDirect appeal (prior to the effectivity of Republic Act 5440) by Maritime Building Co., Inc. from a decision of the Court of First Instance of Manila (in its Civil Case No. 47319), the dispositive part of which provides as follows:FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered declaring that the Myers Building Co., Inc. is entitled to receive the rentals which the plaintiff has been paying, including those already deposited in Court, thereby relieving the plaintiff of any obligation to pay the same to any other party, and ordering the Maritime Building Co., Inc. to pay the commission fees paid by the Myers Building Co., Inc. to the Clerk of this Court, plus the sum of P3,000.00 as and for attorney's fees.On the cross-claim by the Myers Building Co., Inc., the Maritima Building Co., Inc. is hereby ordered to pay the Myers Building Co., Inc. the sum of P10,000.00 damages, plus the sum of P30,000.00, representing rentals wrongfully collected by it from the plaintiff corresponding to the months of March, April and May, 1961 and the costs hereof.The antecedents of the litigation are summarized in the appealed judgment thus:This is an action for interpleading.It appears that on April 30, 1949, in the City of Manila, the defendant Myers Building Co., Inc., owner of three parcels of land in the City of Manila, together with the improvements thereon, entered into a contract entitled "Deed of Conditional Sale" in favor of Bary Building Co., Inc., later known as Maritime Building Co., Inc., whereby the former sold the same to the latter for P1,000,000.00, Philippine currency. P50,000.00 of this price was paid upon the execution of the said contract and the parties agreed that the balance of P950,000.00 was to be paid in monthly installments at the rate of P10,000.00 with interest of 5% per annum until the same was fully paid.In Par. (O), they agreed that in case of failure on the part of the vendee to pay any of the installments due and payable, the contract shall be annulled at the option of the vendor and all payments already made by vendee shall be forfeited and the vendor shall have right to re-enter the property and take possession thereof.Later, the monthly installment of P10,000.00 above-stipulated with 5% interest per annum was amended or decreased to P5,000.00 per month and the interest was raised to 5-1/2% per annum. The monthly installments under the contract was regularly paid by the Bary Building Co., Inc. and/or the Maritime Co., Inc. until the end of February, 1961. It failed to pay the monthly installment corresponding to the month of March 1961, for which the Vice-President, George Schedler, of the Maritime Building Co., Inc., wrote a letter to the President of Myers, Mr. C. Parsons, requesting for a moratorium on the monthly payment of the installments until the end of the year 1961, for the reason that the said company was encountering difficulties in connection with the operation of the warehouse business. However, Mr. C. Parsons, in behalf of the Myers Estate, answered that the monthly payments due were not payable to the Myers Estate but to the Myers Building Co., Inc., and that the Board of Directors of the Myers Co., Inc. refused to grant the request for moratorium for suspension of payments under any condition.Notwithstanding the denial of this request for moratorium by the Myers Board of Directors the Maritime Building Co., Inc. failed to pay the monthly installments corresponding to the months of March, April and May, 1961. Whereupon, on May 16, 1961, the Myers Building Co., Inc. made a

demand upon the Maritime Building Co., Inc., for the payment of the installments that had become due and payable, which letter, however, was returned unclaimed.Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co., Inc. another letter advising it of the cancellation of the Deed of Conditional Sale entered into between them and demanding the return of the possession of the properties and holding the Maritime Building Co., Inc. liable for use and occupation of the said properties at P10,000.00 monthly.In the meantime, the Myers Building Co., Inc. demanded upon the Luzon Brokerage Co., Inc. to whom the Maritime Building Co., Inc. leased the properties, the payment of monthly rentals of P10,000.00 and the surrender of the same to it. As a consequence, the Luzon Brokerage Co., Inc. found itself in a payment to the wrong party, filed this action for interpleader against the Maritime Building Co., Inc.After the filing of this action, the Myers Building Co., Inc. in its answer filed a cross-claim against the Maritime Building Co., Inc. praying for the confirmation of its right to cancel the said contract. In the meantime, the contract between the Maritime Building Co., Inc. and the Luzon Brokerage Co., Inc. was extended by mutual agreement for a period of four (4) more years, from April, 1964 to March 31, 1968.The Maritime Building Co., Inc. now contends (1) that the Myers Building Co., Inc. cannot cancel the contract entered into by them for the conditional sale of the properties in question extrajudicially and (2) that it had not failed to pay the monthly installments due under the contract and, therefore, is not guilty of having violated the same.It should be further elucidated that the suspension by the appellant Maritime Building Co., Inc. (hereinafter called Maritime) of the payment of installments due from it to appellee Myers Building Co., Inc. (hereinafter designated as Myers Corporation) arose from an award of backwages made by the Court of Industrial Relations in favor of members of Luzon Labor Union who served the Fil-American forces in Bataan in early 1942 at the instance of the employer Luzon Brokerage Co. and for which F. H. Myers, former majority stockholder of the Luzon Brokerage Co., had allegedly promised to indemnify E. M. Schedler (who controlled Maritime) when the latter purchased Myers' stock in the Brokerage Company. Schedler contended that he was being sued for the backpay award of some P325,000, when it was a liability of Myers, or of the latter's estate upon his death. In his letter to Myers Corporation (Exhibit "11", Maritime) dated 7 April 1961 (two months and ten days before the initial complaint in the case at bar), Schedler claimed the following:At all times when the F. H. Myers Estate was open in the Philippine Islands and open in San Francisco, the Myers Estate or heirs assumed the defense of the Labor Union claims and led us to believe that they would indemnify us therefrom.Recently, however, for the first time, and after both the Philippine and San Francisco F. H. Myers Estates were closed, we have been notified that the F. H. Myers indemnity on the Labor Union case will not be honored, and in fact Mrs. Schedler and I have been sued in the Philippines by my successor in interest, Mr. Wentholt, and have been put to considerable expense.You are advised that my wife and I, as the owners of the Maritime Building Company, intend to withhold any further payments to Myers Building Company or Estate, in order that we can preserve those funds and assets to set off against the potential liability to which I am now exposed by the failure of the Myers heirs to honor the indemnity agreement pertaining to the Labor claims.The trial court found the position of Schedler indefensible, and that Maritime, by its failure to pay, committed a breach of the sale contract; that Myers Company, from and after the breach, became entitled to terminate the contract, to forfeit the installments paid, as well as to repossess, and collect the rentals of, the building from its lessee, Luzon Brokerage Co., in view of the terms of the conditional contract of sale stipulating that:(d) It is hereby agreed, covenanted and stipulated by and between the parties hereto that the Vendor will execute and deliver to the Vendee a definite or absolute deed of sale upon the full payment by the vendee of the unpaid balance of the purchase price hereinabove stipulated; that should the Vendee fail to pay any of the monthly installments, when due, or otherwise fail to comply with any of the terms and conditions herein stipulated, then this Deed of Conditional Sale shall automatically and without any further formality, become null and void, and all sums so paid by the Vendee by reason thereof, shall be considered as rentals and the Vendor shall then and there be free to enter into the premises, take possession thereof or sell the properties to any other party.xxx xxx xxx(o) In case the Vendee fails to make payment or payments, or any part thereof, as herein provided, or fails to perform any of the covenants or agreements hereof, this contract shall, at the option of the Vendor, be annulled and, in such event, all payments made by the Vendee to the Vendor by virtue of this contract shall be forfeited and retained by the Vendor in full satisfaction of the liquidated damages by said Vendor sustained; and the said Vendor shall have the right to forthwith re-enter, and take possession of, the premises subject-matter of this contract.

"The remedy of forfeiture stated in the next-preceding paragraph shall not be exclusive of any other remedy, but the Vendor shall have every other remedy granted it by virtue of this contract, by law, and by equity."From the judgment of the court below, the dispositive portion whereof has been transcribed at the start of this opinion, Myers duly appealed to this Court.The main issue posed by appellant is that there has been no breach of contract by Maritime; and assuming that there was one, that the appellee Myers was not entitled to rescind or resolve the contract without recoursing to judicial process.It is difficult to understand how appellant Maritime can seriously contend that its failure or refusal to pay the P5,000 monthly installments corresponding to the months of March, April and May, 1961 did not constitute a breach of contract with Myers, when said agreement (transcribed in the Record on Appeal, pages 59-71) expressly stipulated that the balance of the purchase price (P950,000) — shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or before the 10th day of each month with interest at 5% per annum, this amount to be first applied on the interest, and the balance paid to the principal thereof; and the failure to pay any installment or interest when due shall ipso facto cause the whole unpaid balance of the principal and interest to be and become immediately due and payable. (Contract, paragraph b; Record on Appeal, page 63) Contrary to appellant Maritime's averments, the default was not made in good faith. The text of the letter to Myers (Exhibit "11", Maritime), heretofore quoted, leaves no doubt that the non-payment of the installments was the result of a deliberate course of action on the part of appellant, designed to coerce the appellee Myers Corporation into answering for an alleged promise of the late F. H. MYERS to indemnify E. W. Schedler, the controlling stock-holder of appellant, for any payments to be made to the members of the Luzon Labor Union. This is apparent also from appellant's letter to his counsel (Exhibit "12", Maritime):... I do not wish to deposit pesos representing the months of March, April and May, since the Myers refusal to honor the indemnity concerning the labor claims has caused me to disburse (sic) roughly $10,000.00 to date in fees, cost and travel expenses. However, if the Myers people will deposit in trust with Mr. C. Parsons 25,000 pesos to cover my costs to date, I will then deposit with Mr. Parsons, in trust, 15,000 pesos for March, April and May and will also post a monthly deposit of 5,000 pesos until the dispute is settled. The dispute won't be settled in my mind, unless and until:a) The Myers people indemnify me fully the labor cases;b) The labor cases are terminated favorably to Luzon Brokerage and no liability exists;c) The Myers people pay any judgment entered on the labor cases thereby releasing me; ord) It is finally determined either in San Francisco or in the Philippines by a court that the Myers heirs must honor the indemnity which Mr. F. H. Myers promised when I purchased Luzon Brokerage Company.Yet appellant Maritime (assuming that it had validly acquired the claims of its president and controlling stockholder, E. M. Schedler) could not ignore the fact that whatever obligation F. H. Myers or his estate had assumed in favor of Schedler with respect to the Luzon Brokerage labor case was not, and could not have been, an obligation of appellee corporation (Myers Building Company). No proof exists that the board of directors of the Myers Corporation had agreed to assume responsibility for the debts (if any) that the late Myers or his heirs had incurred in favor of Schedler. Not only this, but it is apparent from the letters quoted heretofore that Schedler had allowed the estate proceedings of the late F. M. Myers to close without providing for any contingent liability in Schedler's favor; so that by offsetting the alleged debt of Myers to him, against the balance of the price due under the "Deed of Conditional Sale", appellant Maritime was in fact attempting to burden the Myers Building Company with an uncollectible debt, since enforcement thereof against the estate of F. H. Myers was already barred.Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was a breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence (culpa), "dolo" being succinctly defined as a "conscious and intentional design to evade the normal fulfillment of existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and therefore incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make payment and thereby erase the default or breach that it had deliberately incurred. Thus the lower court committed no error in refusing to extend the periods for payment. To do otherwise would be to sanction a deliberate and reiterated infringement of the contractual obligations incurred by Maritime, an attitude repugnant to the stability and obligatory force of contracts.From another point of view, it is irrelevant whether appellant Maritime's infringement of its contract was casual or serious, for as pointed out by this Court in Manuel vs. Rodriguez, 109 Phil. 1, at page 10 — The contention of plaintiff-appellant that Payatas Subdivision Inc. had no right to cancel the contract as there was only a "casual breach" is likewise untenable. In contracts to sell, where

ownership is retained by the seller and is not to pass until the full payment of the price, such payment, as we said, is a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force, in accordance with Article 1117 of the Old Civil Code. To argue that there was only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory condition, which is not the case.But it is argued for Maritime that even if it had really violated the Contract of Conditional Sale with Myers, the latter could not extrajudicially rescind or resolve the contract, but must first recourse to the courts. While recognizing that paragraph (d) of the deed of conditional sale expressly provides inter alia — that should the Vendee fail to pay any of the monthly installments when due, or otherwise fail to comply with any of the terms and conditions herein stipulated, then this Deed of Conditional Sale shall automatically and without any further formality, become null and void, and all sums so paid by the Vendee by reason thereof shall be considered as rentals.. (Emphasis supplied)herein appellant Maritime avers that paragraph (e) of the deed contemplates that a suit should be brought in court for a judicial declaration of rescission. The paragraph relied upon by Maritime is couched in the following, terms:(e) It is also hereby agreed, covenanted and stipulated by and between the parties hereto that should the Vendor rescind this Deed of Conditional Sale, for any of the reasons stipulated in the preceding paragraph, the Vendee by these presents obligates itself to peacefully deliver the properties subject of this contract to the Vendor, and in the event that the Vendee refuses to peacefully deliver the possession of the properties subject of this contract to the Vendor in case of rescission, and a suit should be brought in court by the Vendor to seek judicial declaration of rescission and take possession of the properties subject of this contract, the Vendee hereby obligates itself to pay all the expenses to be incurred by reason of such suit and in addition obligates itself to pay the sum of P10,000.00, in concept of damages, penalty and attorney's fees.Correlation of this paragraph (e) with the preceding paragraph (d) of the Deed of Conditional Sale (quoted in page 5 of this opinion) reveals no incompatibility between the two; and the suit to "be brought in Court by the Vendor to seek judicial declaration of rescission" is provided for by paragraph(e) only in the eventuality that, notwithstanding the automatic annulment of the deed under paragraph (d), the Vendee "refuses to peacefully deliver the possession of the properties subject of this contract". The step contemplated is logical since the Vendor can not, by himself, dispossess the Vendee manu militari, if the latter should refuse to vacate despite the violation of the contract, since no party can take the law in his own hands. But the bringing of such an action in no way contradicts or restricts the automatic termination of the contract in case the Vendee (i.e., appellant Maritime) should not comply with the agreement.Anyway, this Court has repeatedly held that — Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions" (Lopez vs. Commissioner of Customs, L-28235, 30 January 1971, 37 SCRA 327, 334,, and cases cited therein). 1 (Emphasis supplied.)Resort to judicial action for rescission is obviously not contemplated.... The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. (Ponce Enrile vs. Court of Appeals, L-27549, 30 Sept. 1969; 29 SCRA 504).The obvious remedy of the party opposing the rescission for any reason being to file the corresponding action to question the rescission and enforce the agreement, as indicated in our decision in University of the Philippines vs. Walfrido de los Angeles,

L-28602, 29 September 1970, 35 SCRA 107.Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the

suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). Maritime likewise invokes Article 1592 of the Civil Code of the Philippines as entitling it to pay despite its default: ART. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. Assuming arguendo that Article 1592 is applicable, the cross-claim filed by Myers against Maritime in the court below constituted a judicial demand for rescission that satisfies the requirements of said article.But even if it were not so, appellant overlooks that its contract with appellee Myers is not the ordinary sale envisaged by Article 1592, transferring ownership simultaneously with the delivery of the real property sold, but one in which the vendor retained ownership of the immovable object of the sale, merely undertaking to convey it provided the buyer strictly complied with the terms of the contract (see paragraph [d], ante, page 5). In suing to recover possession of the building from Maritime, appellee Myers is not after the resolution or setting aside of the contract and the restoration of the parties to the status quo ante, as contemplated by Article 1592, but precisely enforcing the provisions of the agreement that it is no longer obligated to part with the ownership or possession of the property because Maritime failed to comply with the specified condition precedent, which is to pay the installments as they fell due.The distinction between contracts of sale and contract to sell with reserved title has been recognized by this Court in repeated decisions 2 upholding the power of promisors under contracts to sell in case of failure of the other party to complete payment, to extrajudicially terminate the operation of the contract, refuse conveyance and retain the sums or installments already received, where such rights are expressly provided for, as in the case at bar.Maritime's appeal that it would be iniquituous that it should be compelled to forfeit the P973,000 already paid to Myers, as a result of its failure to make good a balance of only P319,300.65, payable at P5,000 monthly, becomes unimpressive when it is considered that while obligated to pay the price of one million pesos at P5,000 monthly, plus interest, Maritime, on the other hand, had leased the building to Luzon Brokerage, Inc. since 1949; and Luzon paid P13,000 a month rent, from September, 1951 to August 1956, and thereafter until 1961, at P10,000 a month, thus paying a total of around one and a half million pesos in rentals to Maritime. Even adding to Maritime's losses of P973,000 the P10,000 damages and P3,000 attorneys' fees awarded by the trial court, it is undeniable that appellant Maritime has come out of the entire transaction still at a profit to itself.There remains the procedural objection raised by appellant Maritime to this interpleader action filed by the Luzon Brokerage Co., the lessee of the building conditionally sold by Myers to Maritime. It should be recalled that when Maritime defaulted in its payments to Myers, and the latter notified the former that it was cancelling the contract of conditional sale, Myers also notified Luzon Brokerage, Maritime's lessee of the building, of the cancellation of the sale, and demanded that Luzon should pay to Myers the rentals of the building beginning from June, 1961, under penalty of ejectment (Record on Appeal, pages 14-15). In doubt as to who was entitled to the rentals, Luzon filed this action for interpleader against Myers and Maritime, and deposited the rentals in court as they fell due. The appellant Maritime moved to dismiss on the ground that (a) Luzon could not entertain doubts as to whom the rentals should be paid since Luzon had leased the building from Maritime since 1949, renewing the contract from time to time, and Myers had no right to cancel the lease; and (b) that Luzon was not a disinterested party, since it tended to favor appellee Myers. The court below overruled Maritime's objections and We see no plausible reason to overturn the order. While Myers was not a party to the lease, its cancellation of the conditional sale of the premises to Maritime, Luzon's lessor, could not but raise reasonable doubts as to the continuation of the lease, for the termination of the lessor's right of possession of the premises necessarily ended its right to the rentals falling due thereafter. The preceding portion of our opinion is conclusive that Luzon's doubts were grounded under the law and the jurisprudence of this Court.No adequate proof exists that Luzon was favoring any one of the contending parties. It was interested in being protected against prejudice deriving from the result of the controversy, regardless of who should win. For the purpose it was simpler for Luzon to compel the disputants to litigate between themselves, rather than chance being sued by Myers, and later being compelled to proceed against Maritime to recoup its losses. In any event, Maritime ultimately confirmed the act of Luzon in suing for interpleader, by agreeing to renew Luzon's lease in 1963 during the pendency of the present action, and authorizing Luzon to continue depositing the rentals in court "until otherwise directed by a court of competent jurisdiction" (Exhibit "18-Maritime"). The procedural objection has thus become moot.

PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed, and appellant Maritime Building Co., as well as appellee Luzon Brokerage Co., are further ordered to surrender the premises to the appellee Myers Building Co. Costs against appellant.Republic of the PhilippinesSUPREME COURTManilaFIRST DIVISIONG.R. No. L-44428 September 30, 1977AVELINO BALURAN, petitioner, vs.HON. RICARDO Y. NAVARRO, Presiding Judge, Court of First Instance of Ilocos Norte, Branch I and ANTONIO OBEDENCIO, respondents. Alipio V. Flores for petitioner.Rafael B. Ruiz for private respondent.

MUÑOZ PALMA, J.:Spouses Domingo Paraiso and Fidela Q. Paraiso were the owners of a residential lot of around 480 square meters located in Sarrat, Ilocos Norte. On or about February 2, 1964, the Paraisos executed an agreement entitled "BARTER" whereby as party of the first part they agreed to "barter and exchange" with spouses Avelino and Benilda Baluran their residential lot with the latter's unirrigated riceland situated in Sarrat, Ilocos Norte, of approximately 223 square meters without any permanent improvements, under the following conditions: 1. That both the Party of the First Part and the Party of the Second Part shall enjoy the material possession of their respective properties; the Party of the First Part shall reap the fruits of the unirrigated riceland and the Party of the Second Part shall have a right to build his own house in the residential lot. 2. Nevertheless, in the event any of the children of Natividad P. Obencio, daughter of the First Part, shall choose to reside in this municipality and build his own house in the residential lot, the Party of the Second Part shall be obliged to return the lot such children with damages to be incurred. 3. That neither the Party of the First Part nor the Party of the Second Part shall encumber, alienate or dispose of in any manner their respective properties as bartered without the consent of the other.4. That inasmuch as the bartered properties are not yet accordance with Act No. 496 or under the Spanish Mortgage Law, they finally agreed and covenant that this deed be registered in the Office of the Register of Deeds of Ilocos Norte pursuant to the provisions of Act No. 3344 as amended. (p. 28, rollo) On May 6, 1975 Antonio Obendencio filed with the Court of First Instance of Ilocos Norte the present complaint to recover the above-mentioned residential lot from Avelino Baluran claiming that he is the rightful owner of said residential lot having acquired the same from his mother, Natividad Paraiso Obedencio, and that he needed the property for Purposes Of constructing his house thereon inasmuch as he had taken residence in his native town, Sarrat. Obedencio accordingly prayed that he be declared owner of the residential lot and that defendant Baluran be ordered to vacate the same forfeiting his (Obedencio) favor the improvements defendant Baluran had built in bad faith.1 Answering the complaint, Avelino Baluran alleged inter alia (1) that the "barter agreement" transferred to him the ownership of the residential lot in exchange for the unirrigated riceland conveyed to plaintiff's Predecessor-in-interest, Natividad Obedencio, who in fact is still in On thereof, and (2) that the plaintiff's cause of action if any had prescribed. 2At the pre-trial, the parties agreed to submit the case for decision on the basis of their stipulation of facts. It was likewise admitted that the aforementioned residential lot was donated on October 4, 1974 by Natividad Obedencio to her son Antonio Obedencio, and that since the execution of the agreement of February 2, 1964 Avelino Baluran was in possession of the residential lot, paid the taxes of the property, and constructed a house thereon with an value of P250.00. 3 On November 8, 1975, the trial Judge Ricardo Y. Navarro rendered a decision the dispositive portion of which reads as follows: Consequently, the plaintiff is hereby declared owner of the question, the defendant is hereby ordered to vacate the same with costs against defendant.Avelino Baluran to whom We shall refer as petitioner, now seeks a review of that decision under the following assignment of errors: I — The lower Court erred in holding that the barter agreement did not transfer ownership of the lot in suit to the petitioner. II — The lower Court erred in not holding that the right to re-barter or re- exchange of respondent Antonio Obedencio had been barred by the statute of limitation. (p. 14, Ibid.)The resolution of this appeal revolves on the nature of the undertaking contract of February 2, 1964 which is entitled "Barter Agreement."

It is a settled rule that to determine the nature of a contract courts are not bound by the name or title given to it by the contracting parties. 4 This Court has held that contracts are not what the parties may see fit to call them but what they really are as determined by the principles of law. 5 Thus, in the instant case, the use of the, term "barter" in describing the agreement of February 2, 1964, is not controlling. The stipulations in said document are clear enough to indicate that there was no intention at all on the part of the signatories thereto to convey the ownership of their respective properties; all that was intended, and it was so provided in the agreement, was to transfer the material possession thereof. (condition No. 1, see page I of this Decision) In fact, under condition No. 3 of the agreement, the parties retained the right to alienate their respective properties which right is an element of ownership. With the material ion being the only one transferred, all that the parties acquired was the right of usufruct which in essence is the right to enjoy the Property of another. 6 Under the document in question, spouses Paraiso would harvest the crop of the unirrigated riceland while the other party, Avelino Baluran, could build a house on the residential lot, subject, however, to the condition, that when any of the children of Natividad Paraiso Obedencio, daughter of spouses Paraiso, shall choose to reside in the municipality and build his house on the residential lot, Avelino Baluran shall be obliged to return the lot to said children "With damages to be incurred." (Condition No. 2 of the Agreement) Thus, the mutual agreement — each party enjoying "material possession" of the other's property — was subject to a resolutory condition the happening of which would terminate the right of possession and use. A resolutory condition is one which extinguishes rights and obligations already existing. 7 The right of "material possession" granted in the agreement of February 2, 1964, ends if and when any of the children of Natividad Paraiso, Obedencio (daughter of spouses Paraiso, Party of the First Part) would reside in the municipality and build his house on the property. Inasmuch as the condition opposed is not dependent solely on the will of one of the parties to the contract — the spouses Paraiso — but is Part dependent on the will of third persons — Natividad Obedencio and any of her children — the same is valid. 8 When there is nothing contrary to law, morals, and good customs Or Public Policy in the stipulations of a contract, the agreement constitutes the law between the parties and the latter are bound by the terms thereof. 9 Art. 1306 of the Civil Code states: Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, Morals, good customs, public order, or public policy.Contracts which are the private laws of the contracting parties, should be fulfilled according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter what their form may be, whenever the essential requisites for their validity are present. (Philippine American General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22) The trial court therefore correctly adjudged that Antonio Obedencio is entitled to recover the possession of the residential lot Pursuant to the agreement of February 2, 1964. Petitioner submits under the second assigned error that the causa, of action if any of respondent Obedencio had Prescribed after the lapse of four years from the date of execution of the document of February 2, 1964. It is argued that the remedy of plaintiff, now respondent, Was to ask for re-barter or re-exchange of the properties subject of the agreement which could be exercised only within four years from the date of the contract under Art. 1606 of the Civil Code.The submission of petitioner is untenable. Art. 1606 of the Civil Code refers to conventional redemption which petitioner would want to apply to the present situation. However, as We stated above, the agreement of the parties of February 2, 1964, is not one of barter, exchange or even sale with right to repurchase, but is one of or akin the other is the use or material ion or enjoyment of each other's real property. Usufruct may be constituted by the parties for any period of time and under such conditions as they may deem convenient and beneficial subject to the provisions of the Civil Code, Book II, Title VI on Usufruct. The manner of terminating or extinguishing the right of usufruct is primarily determined by the stipulations of the parties which in this case now before Us is the happening of the event agreed upon. Necessarily, the plaintiff or respondent Obedencio could not demand for the recovery of possession of the residential lot in question, not until he acquired that right from his mother, Natividad Obedencio, and which he did acquire when his mother donated to him the residential lot on October 4, 1974. Even if We were to go along with petitioner in his argument that the fulfillment of the condition cannot be left to an indefinite, uncertain period, nonetheless, in the case at bar, the respondent, in whose favor the resolutory condition was constituted, took immediate steps to terminate the right of petitioner herein to the use of the lot. Obedencio's present complaint was filed in May of 1975, barely several months after the property was donated to him. One last point raised by petitioner is his alleged right to recover damages under the agreement of February 2, 1964. In the absence of evidence, considering that the parties agreed to submit

the case for decision on a stipulation of facts, We have no basis for awarding damages to petitioner. However, We apply Art. 579 of the Civil Code and hold that petitioner will not forfeit the improvement he built on the lot but may remove the same without causing damage to the property. Art. 579. The usufructuary may make on the property held in usufruct such useful improvements or expenses for mere pleasure as he may deem proper, provided he does not alter its form or substance; but he shall have no right to be indemnified therefor. He may, however. He may, however, removed such improvements, should it be possible to do so without damage to the property. (Emphasis supplied) Finally, We cannot close this case without touching on the unirrigated riceland which admittedly is in the possession of Natividad Obedencio. In view of our ruling that the "barter agreement" of February 2, 1964, did not transfer the ownership of the respective properties mentioned therein, it follows that petitioner Baluran remains the owner of the unirrigated riceland and is now entitled to its Possession. With the happening of the resolutory condition provided for in the agreement, the right of usufruct of the parties is extinguished and each is entitled to a return of his property. it is true that Natividad Obedencio who is now in possession of the property and who has been made a party to this case cannot be ordered in this proceeding to surrender the riceland. But inasmuch as reciprocal rights and obligations have arisen between the parties to the so-called "barter agreement", We hold that the parties and for their successors-in-interest are duty bound to effect a simultaneous transfer of the respective properties if substance at justice is to be effected. WHEREFORE, Judgment is hereby rendered: 1) declaring the petitioner Avelino Baluran and respondent Antonio Obedencio the respective owners the unirrigated riceland and residential lot mentioned in the "Barter Agreement" of February 2, 1964; 2) ordering Avelino Baluran to vacate the residential lot and removed improvements built by thereon, provided, however that he shall not be compelled to do so unless the unirrigated riceland shall five been restored to his possession either on volition of the party concerned or through judicial proceedings which he may institute for the purpose. Without pronouncement as to costs.So Ordered.Republic of the PhilippinesSUPREME COURTManilaSECOND DIVISIONG.R. No. L-48194 March 15, 1990JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners, vs.COURT OF APPEALS and LEONARDO TIRO, respondents.Eddie Tamondong for petitioners.Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.

REGALADO, J.:Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof decrees:WHEREFORE, the judgment appealed from is hereby set aside and another one entered ordering the defendants-appellees, jointly and solidarily, to pay plaintiff-appellant the sum of P79,338.15 with legal interest thereon from the filing of the complaint, plus attorney's fees in the amount of P8,000.00. Costs against defendants-appellees. 2As found by respondent court or disclosed by the records, 3 this case was generated by the following antecedent facts.Private respondent is a holder of an ordinary timber license issued by the Bureau of Forestry covering 2,535 hectares in the town of Medina, Misamis Oriental. On February 15, 1966 he executed a "Deed of Assignment" 4 in favor of herein petitioners the material parts of which read as follows:xxx xxx xxxI, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00), Philippine Currency, do by these presents, ASSIGN, TRANSFER AND CONVEY, absolutely and forever unto JOSE M. JAVIER and ESTRELLA F. JAVIER, spouses, of legal age and a resident (sic) of 2897 F.B. Harrison, Pasay City, my shares of stocks in the TIMBERWEALTH CORPORATION in the total amount of P120,000.00, payment of which shall be made in the following manner:1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of export logs actually produced from the forest concession of Timberwealth Corporation.That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs. Jose M. Javier, as soon as stock certificates are issued.xxx xxx xxx

At the time the said deed of assignment was executed, private respondent had a pending application, dated October 21, 1965, for an additional forest concession covering an area of 2,000 hectares southwest of and adjoining the area of the concession subject of the deed of assignment. Hence, on February 28, 1966, private respondent and petitioners entered into another "Agreement" 5 with the following stipulations:xxx xxx xxx1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and convey whatever rights he may acquire, absolutely and forever, to TIMBERWEALTH CORPORATION, a corporation duly organized and existing under the laws of the Philippines, over a forest concession which is now pending application and approval as additional area to his existing licensed area under O.T. License No. 391-103166, situated at Medina, Misamis Oriental;2. That for and in consideration of the aforementioned transfer of rights over said additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and JOSE M. JAVIER, both directors and stockholders of said corporation, do hereby undertake to pay LEONARDO TIRO, as soon as said additional area is approved and transferred to TIMBERWEALTH CORPORATION the sum of THIRTY THOUSAND PESOS (P30,000.00), which amount of money shall form part of their paid up capital stock in TIMBERWEALTH CORPORATION;3. That this Agreement is subject to the approval of the members of the Board of Directors of the TIMBERWEALTH CORPORATION.xxx xxx xxxOn November 18, 1966, the Acting Director of Forestry wrote private respondent that his forest concession was renewed up to May 12, 1967 under O.T.L. No. 391-51267, but since the concession consisted of only 2,535 hectares, he was therein informed that:In pursuance of the Presidential directive of May 13, 1966, you are hereby given until May 12, 1967 to form an organization such as a cooperative, partnership or corporation with other adjoining licensees so as to have a total holding area of not less than 20,000 hectares of contiguous and compact territory and an aggregate allowable annual cut of not less than 25,000 cubic meters, otherwise, your license will not be further renewed. 6Consequently, petitioners, now acting as timber license holders by virtue of the deed of assignment executed by private respondent in their favor, entered into a Forest Consolidation Agreement 7 on April 10, 1967 with other ordinary timber license holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano R. Oca and Sanggaya Logging Company. Under this consolidation agreement, they all agreed to pool together and merge their respective forest concessions into a working unit, as envisioned by the aforementioned directives. This consolidation agreement was approved by the Director of Forestry on May 10, 1967. 8 The working unit was subsequently incorporated as the North Mindanao Timber Corporation, with the petitioners and the other signatories of the aforesaid Forest Consolidation Agreement as incorporators. 9On July 16, 1968, for failure of petitioners to pay the balance due under the two deeds of assignment, private respondent filed an action against petitioners, based on the said contracts, for the payment of the amount of P83,138.15 with interest at 6% per annum from April 10, 1967 until full payment, plus P12,000.00 for attorney's fees and costs.On September 23, 1968, petitioners filed their answer admitting the due execution of the contracts but interposing the special defense of nullity thereof since private respondent failed to comply with his contractual obligations and, further, that the conditions for the enforceability of the obligations of the parties failed to materialize. As a counterclaim, petitioners sought the return of P55,586.00 which private respondent had received from them pursuant to an alleged management agreement, plus attorney's fees and costs.On October 7, 1968, private respondent filed his reply refuting the defense of nullity of the contracts in this wise:What were actually transferred and assigned to the defendants were plaintiff's rights and interest in a logging concession described in the deed of assignment, attached to the complaint and marked as Annex A, and agreement Annex E; that the "shares of stocks" referred to in paragraph II of the complaint are terms used therein merely to designate or identify those rights and interests in said logging concession. The defendants actually made use of or enjoyed not the "shares of stocks" but the logging concession itself; that since the proposed Timberwealth Corporation was owned solely and entirely by defendants, the personalities of the former and the latter are one and the same. Besides, before the logging concession of the plaintiff or the latter's rights and interests therein were assigned or transferred to defendants, they never became the property or assets of the Timberwealth Corporation which is at most only an association of persons composed of the defendants. 10and contending that the counterclaim of petitioners in the amount of P55,586.39 is actually only a part of the sum of P69,661.85 paid by the latter to the former in partial satisfaction of the latter's claim. 11After trial, the lower court rendered judgment dismissing private respondent's complaint and ordering him to pay petitioners the sum of P33,161.85 with legal interest at six percent per annum from the date of the filing of the answer until complete payment. 12

As earlier stated, an appeal was interposed by private respondent to the Court of Appeals which reversed the decision of the court of a quo.On March 28, 1978, petitioners filed a motion in respondent court for extension of time to file a motion for reconsideration, for the reason that they needed to change counsel. 13 Respondent court, in its resolution dated March 31, 1978, gave petitioners fifteen (15) days from March 28, 1978 within which to file said motion for reconsideration, provided that the subject motion for extension was filed on time. 14 On April 11, 1978, petitioners filed their motion for reconsideration in the Court of Appeals. 15 On April 21, 1978, private respondent filed a consolidated opposition to said motion for reconsideration on the ground that the decision of respondent court had become final on March 27, 1978, hence the motion for extension filed on March 28, 1978 was filed out of time and there was no more period to extend. However, this was not acted upon by the Court of Appeals for the reason that on April 20, 1978, prior to its receipt of said opposition, a resolution was issued denying petitioners' motion for reconsideration, thus:The motion for reconsideration filed on April 11, 1978 by counsel for defendants-appellees is denied. They did not file any brief in this case. As a matter of fact this case was submitted for decision without appellees' brief. In their said motion, they merely tried to refute the rationale of the Court in deciding to reverse the appealed judgment. 16Petitioners then sought relief in this Court in the present petition for review on certiorari. Private respondent filed his comment, reiterating his stand that the decision of the Court of Appeals under review is already final and executory.Petitioners countered in their reply that their petition for review presents substantive and fundamental questions of law that fully merit judicial determination, instead of being suppressed on technical and insubstantial reasons. Moreover, the aforesaid one (1) day delay in the filing of their motion for extension is excusable, considering that petitioners had to change their former counsel who failed to file their brief in the appellate court, which substitution of counsel took place at a time when there were many successive intervening holidays.On July 26, 1978, we resolved to give due course to the petition.The one (1) day delay in the filing of the said motion for extension can justifiably be excused, considering that aside from the change of counsel, the last day for filing the said motion fell on a holiday following another holiday, hence, under such circumstances, an outright dismissal of the petition would be too harsh. Litigations should, as much as possible, be decided on their merits and not on technicalities. In a number of cases, this Court, in the exercise of equity jurisdiction, has relaxed the stringent application of technical rules in order to resolve the case on its merits. 17 Rules of procedure are intended to promote, not to defeat, substantial justice and, therefore, they should not be applied in a very rigid and technical sense.We now proceed to the resolution of this case on the merits.The assignment of errors of petitioners hinges on the central issue of whether the deed of assignment dated February 15, 1966 and the agreement of February 28, 1966 are null and void, the former for total absence of consideration and the latter for non-fulfillment of the conditions stated therein.Petitioners contend that the deed of assignment conveyed to them the shares of stocks of private respondent in Timberwealth Corporation, as stated in the deed itself. Since said corporation never came into existence, no share of stocks was ever transferred to them, hence the said deed is null and void for lack of cause or consideration.We do not agree. As found by the Court of Appeals, the true cause or consideration of said deed was the transfer of the forest concession of private respondent to petitioners for P120,000.00. This finding is supported by the following considerations, viz:

1. Both parties, at the time of the execution of the deed of assignment knew that the Timberwealth Corporation stated therein was non-existent. 182. In their subsequent agreement, private respondent conveyed to petitioners his inchoate right over a forest concession covering an additional area for his existing forest concession, which area he had applied for, and his application was then pending in the Bureau of Forestry for approval.3. Petitioners, after the execution of the deed of assignment, assumed the operation of the logging concessions of private respondent. 194. The statement of advances to respondent prepared by petitioners stated: "P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on the agreement, we pay P10,000.00 every after (sic) shipment. We had only 2 shipments" 205. Petitioners entered into a Forest Consolidation Agreement with other holders of forest concessions on the strength of the questioned deed of assignment. 21The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal that the cause stated in the questioned deed of assignment is false. It is settled that the previous and simultaneous and subsequent acts of the parties are properly cognizable indica of their true intention. 22 Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract, determining its meaning and ascertaining the mutual intention

of the parties at the time of contracting. 23 The parties' practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the agreement. 24The deed of assignment of February 15, 1966 is a relatively simulated contract which states a false cause or consideration, or one where the parties conceal their true agreement. 25 A contract with a false consideration is not null and void per se. 26 Under Article 1346 of the Civil Code, a relatively simulated contract, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.The Court of Appeals, therefore, did not err in holding petitioners liable under the said deed and in ruling that —. . . In view of the analysis of the first and second assignment of errors, the defendants-appellees are liable to the plaintiff-appellant for the sale and transfer in their favor of the latter's forest concessions. Under the terms of the contract, the parties agreed on a consideration of P120,000.00. P20,000.00 of which was paid, upon the signing of the contract and the balance of P100,000.00 to be paid at the rate of P10,000.00 for every shipment of export logs actually produced from the forest concessions of the appellant sold to the appellees. Since plaintiff-appellant's forest concessions were consolidated or merged with those of the other timber license holders by appellees' voluntary act under the Forest Consolidation Agreement (Exhibit D), approved by the Bureau of Forestry (Exhibit D-3), then the unpaid balance of P49,338.15 (the amount of P70,661.85 having been received by the plaintiff-appellant from the defendants-appellees) became due and demandable. 27As to the alleged nullity of the agreement dated February 28, 1966, we agree with petitioners that they cannot be held liable thereon. The efficacy of said deed of assignment is subject to the condition that the application of private respondent for an additional area for forest concession be approved by the Bureau of Forestry. Since private respondent did not obtain that approval, said deed produces no effect. When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the event which constitutes the condition happens or is fulfilled. 28 If the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. 29The said agreement is a bilateral contract which gave rise to reciprocal obligations, that is, the obligation of private respondent to transfer his rights in the forest concession over the additional area and, on the other hand, the obligation of petitioners to pay P30,000.00. The demandability of the obligation of one party depends upon the fulfillment of the obligation of the other. In this case, the failure of private respondent to comply with his obligation negates his right to demand performance from petitioners. Delivery and payment in a contract of sale, are so interrelated and intertwined with each other that without delivery of the goods there is no corresponding obligation to pay. The two complement each other. 30Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence. In this case, since private respondent never acquired any right over the additional area for failure to secure the approval of the Bureau of Forestry, the agreement executed therefor, which had for its object the transfer of said right to petitioners, never became effective or enforceable.WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The agreement of the parties dated February 28, 1966 is declared without force and effect and the amount of P30,000.00 is hereby ordered to be deducted from the sum awarded by respondent court to private respondent. In all other respects, said decision of respondent court is affirmed.SO ORDEREDRepublic of the PhilippinesSUPREME COURTManilaFIRST DIVISIONG.R. No. 137823 December 15, 2000REYNALDO MORTEL, petitioner, vs.KASSCO, INC. and OSCAR SANTOS, respondents.D E C I S I O NKAPUNAN, J.:This is a petition for review on certiorari of the Decision of the Court of Appeals,1 dated September 30, 1998, in C.A. GR CV No. 52059 which affirmed the Decision of the Regional Trial Court of Makati City, Branch 66, in Civil Case No. 89-3260 dismissing petitioner’s complaint for specific performance and/or rescission with damages.The facts leading to the filing of the present petition are as follows:KASSCO, Inc. is the registered owner of the lot covered by Transfer Certificate of Title No. 137791 as well as the building (named "Kassco Building") standing thereon located at the corner

of Cavite and Lico Streets, Rizal Avenue, Sta. Cruz, Manila. To secure a loan obtained from the Philippine National Bank (PNB), which was renting the first floor of the building, KASSCO, Inc. mortgaged such property to the latter. This mortgage was duly annotated at the back of TCT No. 137791 on May 11, 1981.In 1985, KASSCO, Inc. applied for the conversion of the Kassco Building into a condominium which application was approved by the then Human Settlements Regulatory Commission (HSRC) on August 9, 1985. As a requirement for registration and issuance of a license to sell, KASSCO, Inc. wrote PNB to secure its approval of the said conversion and the partial release or cancellation of the mortgage over the fully-paid units.In the same year, KASSCO, Inc., represented by Oscar Santos, entered into an "Agreement" with herein petitioner Reynaldo Mortel, the pertinent provisions of which provide:WHEREAS, the SELLER has offered to sell the second floor of the above-mentioned building, with the floor area of One Hundred Sixty Five (165) square meters, more or less, including common areas (referred to herein as "Second Floor") and the buyer has agreed to buy the same, subject to the terms and conditions hereinafter set forth:WHEREAS, the aforementioned property is the subject of an application for conversion into a commercial condominium filed with the Human Settlements Regulatory Commission of the Ministry of Human Settlements, which has been recently approved:NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual stipulations hereinafter set forth, the parties hereby agree and bind themselves as follows:1. Object of the Salexxx2. Purchase Pricexxx3. Manner of PaymentUpon securing the individual condominium certificate of title (CCT) over the Kassco Building, which the SELLER undertakes to accomplish within one year from execution hereof, the seller shall execute a Deed of Absolute sale in favor and deliver to the buyer the CCT corresponding to the Second Floor, free from any liens and encumbrances. Simultaneously, and to secure the payment by the buyer of the purchase price or balance thereof, the BUYER shall execute a Deed of Mortgage in favor of the SELLER over the said second Floor. The buyer undertakes to pay the full purchase price, or the remaining thereof, within two (2) months from the delivery of the CCT. Should the buyer fail to pay in full the agreed purchase price within two (2) months as herein agreed upon, the parties shall renegotiate the purchase price based on the prevailing Market Value of the property.Upon full payment of the BUYER of the purchase price, the SELLER shall deliver to the BUYER a Deed of Release canceling the aforesaid mortgage.4. Possessionxxx5. Lease and RentalPending the delivery of the title to the BUYER and payment to the SELLER of the full amount of the purchase price, a contract of lease for definite period of one (1) year from the date of this agreement, is hereby constituted on the aforementioned Second Floor of the Kassco Building, subject to the following terms and conditions:a. xxxb. The lease herein constitute shall be deemed automatically terminated upon full payment of the purchase price to the SELLER, or the expiration of the agreed one (1) year lease period, whichever comes first.c. If the Deed of Absolute Sale is not executed through no fault of the SELLER, BUYER-LESSEE shall peacefully and voluntarily vacate the premises upon the expiration of the one (1) year period. However, should SELLER fail to obtain the CCT or authority to sell within the one (1) year period agreed upon and delay or failure is attributable to the SELLER, the buyer may exercise any of the following options: 1) renew and/or extend the lease for another year under such terms and conditions mutually agreed upon between the parties; or 1) vacate the premises but shall have the right to buy the Second Floor for the purchase price reasonably fixed at such time that the SELLER is ready to convey ownership thereof.7. ImprovementsxxxThe buyer may introduce additional improvements on the premises herein agreed to be bought and sold but in case of non-payment of the purchase price and expiration of the lease period, such improvement shall be forfeited in favor of the SELLER.2KASSCO, Inc.’s request for partial cancellation of mortgage and delivery of TCT No. 137791 remained unacted upon by PNB such that the one-year period of lease with petitioner, as embodied in the "Agreement" expired without KASSCO securing and delivering the Condominium Certificate of Title (CCT) to petitioner.Thus, petitioner and private respondent executed another agreement which substantially contained the same terms and conditions as the first agreement and modified only insofar as the

purchase price and monthly rental fee of P680,000.00 and P5,000.00, respectively, were increased to P816,000.00 and P7,000.00.The period covered by the second agreement again lapsed without KASSCO obtaining the release of the mortgage with PNB and the Condominium Certificate of Title. Nonetheless, petitioner remained in occupation of the premises at a monthly rental fee of P7,000.00.On November 10, 1988, KASSCO ordered petitioner to vacate the premises and to pay an additional rental fee of P2,000.00 per month from October 18, 1987 to October 18,1988. KASSCO also increased the monthly rental fee to P11,550.00 effective October 18, 1988.On November 24, 1988, petitioner, in response, demanded from private respondent the delivery of the CCT over the subject property and the execution of a Deed of Absolute Sale in his favor.This prompted KASSCO, Inc. to file a complaint for unlawful detainer against petitioner on December 13, 1988. Petitioner Mortel, in turn, instituted the present case for specific performance or rescission with damages against KASSCO, Inc. When Oscar Santos failed to file his Answer within the reglementary period, he was declared in default and herein petitioner presented evidence ex-parte. Meanwhile, during the pendency of the case, the Kassco Building was foreclosed due to KASSCO’s failure to settle its obligation with PNB.On November 29, 1995, the Regional Trial Court dismissed petitioner’s complaint. This dismissal was affirmed by the Court of Appeals on September 30, 1998. Hence, the present petition.Petitioner contends that since the 1985 and 1986 agreements were in the nature of a contract to sell a condominium, then the pertinent provisions of the Condominium Law, P.D. 957 and the Law on Sale of Real Estate on Installment, R.A. 6581, shall apply such that he may recover whatever he has paid as partial payment and monthly rental fees under said agreements and likewise be reimbursed the value of the improvements he has introduced to the subject property.Petitioner further attributes misrepresentation and bad faith to private respondent KASSCO, Inc. for its alleged failure to inform petitioner that the property was mortgaged to PNB and that it has not yet secured a license to sell at the time the subject agreements were entered into.The Court finds no merit in the petition.In interpretation of contracts, it is an elementary rule that if the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, then the literal meaning of its stipulations shall control.3Clearly discernible from the subject Agreements is the existence of two contracts - the first is the principal contract to sell the second floor of the Kassco Building, and second is a contract of lease over the same property, pending delivery of title by KASSCO, effective for a period of one year from date of execution of the said agreements.From its terms, the first contract is doubtlessly a contract to sell because ownership is reserved in the vendor and title is not to pass until full payment of the purchase price.4 Moreover, this contract to sell is subject to a suspensive condition which is the acquisition of individual condominium certificates of title (CCT) over the building which private respondent undertook to accomplish within one year from date of execution. In contracts subject to a suspensive condition, the birth or effectivity of such contracts only takes place if and when the event constituting the condition happens or is fulfilled, and if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed.5In the present petition, the effectivity of the contract to sell is conditioned upon the obtainment and delivery of the condominium certificate of title to petitioner by private respondent. Under the terms of the agreement, title shall only pass and a deed of absolute sale shall only be executed in favor of the buyer upon securing individual CCTs over the subject property. The non-fulfillment of this condition is thus evident when KASSCO, Inc. failed to secure the partial cancellation of its mortgage and the return of its Transfer Certificate of Title by PNB, both of which were indispensable to registration and the issuance of a license to sell a condominium, which in turn, are prerequisites to the issuance of a CCT.When private respondent thus failed to secure CCTs over the property subject of this controversy, the contract to sell did not take into effect. Consequently, the laws invoked by petitioner, PD 957 and RA 6581, find no application to the present case because said laws presuppose the existence of a valid and effective contract to sell a condominium. As succinctly pointed out by the Court of Appeals, the parties must have, in fact, anticipated the non-fulfillment of the suspensive condition when they incorporated the lease contract in their agreements.6 Moreover, the subsequent act of herein petitioner, specifically, the payment of monthly rental fees evidenced by receipts denominated as "rental" confirm petitioner’s assent to the lease contract embodied in the subject agreements. Since, the conditional obligation is deemed not to have existed by reason of the non-fulfillment of the suspensive condition, the award of damages under Art. 1191 of the Civil Code7 is unwarranted.1âwphi1As to the allegation of bad faith and misrepresentation on the part of private respondent KASSCO, Inc., again, the contention is bereft of merit. It is well-settled that bad faith cannot be presumed and must be established by clear and convincing evidence.8 And the person who seeks damages due to the acts of another has the burden of proving that the latter acted in bad faith or with ill-motive.9 In the case under scrutiny, petitioner failed to show bad faith on the part

of private respondent KASSCO, Inc. We quote with approval the disquisitions of the court a quo on the matter as affirmed by the Court of Appeals:In the ordinary course of things, prudence dictates that a buyer of a real property (plaintiff claims to be so) would look into the title thereof. xxx Plaintiff is a sales manager of PHILAMLIFE Co. and it is expected that a person holding such a position will not readily enter into a contract without exercising ordinary care by checking the title covering the property.Moreover, plaintiff testified that he learned of the mortgage in the middle of the year 1986 when the first agreement was in operation (TSN, Oct. 23, 1993: p.11-12). If this was so, plaintiff should have asked for explanation about the said mortgage or protested the same. This, he did not do. Notwithstanding this knowledge, he entered into another agreement for (sic) October 18, 1986 to October 18, 1987 with the same terms and conditions as the 1985 agreement except for the purchase price and the monthly rents. (Exh. "B" or "2").10As to the alleged representations made by private respondent that it had license to sell condominium units at the time the subject agreements were executed, the Court finds no such misrepresentation. The only assurance given by private respondent to herein petitioner is that its application for conversion of the Kassco Building into a commercial condominium has been approved by the HSRC. In fact, the undertaking assumed by herein private respondent to secure individual condominium certificates of title over the subject property within one year from date of execution of the agreement is an indication that its registration and the issuance of its license to sell was still in process.Finally, it must be pointed out that neither the law nor the courts will excuse a party from an unwise or undesirable contract he or she entered into with all the required formalities and with full awareness of its consequences11 as in the case of herein petitioner.WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals, dated September 30, 1998, in CA-GR CV No. 52059 is hereby AFFIRMED.SO ORDERED.

Digested:

DKC Holdings Corp. v. CA

- DKC entered into a Contract of Lease with Option to Buy with Encarnacion Bartolome, whereby DKC was given the option to lease or lease with purchase a land belonging to Encarnacion, which option must be exercised within 2 years from the signing of the Contract.

- In turn, DKC undertook to pay Php 3,000 a month for the reservation of its option.- DKC regularly paid the monthly Php 3,000 until Encarnacion’s death. Thereafter, DKC coursed

its payment to Victor, the son and sole heir of Encarnacion. However, Victor refused to accept these payments.

- Meanwhile, Victor executed an Affidavit of Self-Adjudication over all the properties of Encarnacion, including the subject lot. Thus, a new TCT was issued in the name of Victor.

- Later, DKC gave notice to Victor that it was exercising its option to lease the property tendering the amount of Php 15,000 as rent.

- Again, Victor refused to accept the payment and to surrender passion of the property.- DKC thus opened a savings account in the name of Victor and deposited therein the rental fee.- DKC also tried to register and annotate the Contract on the title of Victor but the Register of

Deeds refused to register or annotate the same.- Thus, DKC filed a complaint for specific performance and damages.- In the course of the proceedings, a certain Lozano, who claimed that he was and has been a

tenant-tiller of the lot for 45 years, filed a Motion for Intervention. - The RTC denied Lozano’s Motion and dismissed the complaint filed by DKC. - Whether the Contract of Lease with Option to Buy entered into by the late Encarnacion

Bartolome with DKC was terminated upon her death or whether it binds her sole heir, Victor, even after her demise.

- The SC held that Victor is bound by the Contract of Lease with Option to Buy.- Article 1311 of the NCC provides: Contracts take effect only between the parties, their assigns

and heirs, except in case where the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation or (3) provision of law.

- In this case, there is neither contractual stipulation nor legal provision making the rights and obligation under the contract intransmissible. More importantly, the nature of the rights and obligations therein are, by their nature, transmissible.

- Where the service or act is of such a character that it may be performed by another, or where the contract, by its terms, shows the performance by others was contemplated, death does not terminate the contract or excuse nonperformance.

- In this case, there is no personal act required from the late Encarnacion. Rather, the obligation of Encarnacion to deliver possession of the property may very well be performed by Victor.

- Also, the subject matter of the contract is a lease, a property right. The death of a party does not excuse nonperformance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased.

- Since DKC exercised its option in accordance with the contract, the SC held that Victor has the obligation to surrender possession of and lease of premises for 6 years. However, SC held that the issue of tenancy should be ventilated in another proceeding.

- The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-in-interest exceptwhen the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation or (3) provision of law.

- Where acts stipulated in a contract require the exercise of special knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties, the agreement is of personal nature, and terminates on the death of the party who is required to render such service.

- There is privity of interest between an heir and his deceased predecessor – he only succeeds to what rights his predecessor had and what is valid and binding against the latter is also valid and binding against the former.

- The death of a party does not excuse nonperformance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract.

Commissioner of Internal Revenue v. Visayan Electric Co. DETAILS: G.R. No. L-22611, May 27, 1968 FACTS: Visayan Electric Co. (Visayan) holds a legislative franchise to operate and maintain an electric light, heat, and power system in Cebu City, some municipalities in the Province of Cebu and other surrounding places. It established a pension fund known as the Employees’ Reserve for Pensions for the benefit of its present and future employees in the event of a retirement, accident, and disability. An amount is set aside for this purpose every month and is taken from the gross operating receipts of the company. This reserve fund was later invested by the company in stocks of San Miguel Brewery, Inc. for which dividends have been regularly received but these dividends were not declared for tax purposes. The Auditor General sent Visayan a letter in 1949, informing them that since the company retained full control of the fund, the dividends are therefore not tax exempt but that such dividends may be excluded from gross receipts for franchise tax purposes provided that they are declared for income tax purposes. Because of this, the Provincial Auditor of Cebu allowed the company the option to declare the dividends either as part of the company’s income for income tax purposes or as part of its income for franchise tax purposes. The company chose the latter. The Revenue Examiner of Cebu conducted a separate investigation for the BIR and also discovered that the company is the custodian or has complete control of the fund but disagreed with the Provincial Auditor and instead considered the dividends as subject to the corporate income tax under Sec. 24 of the NIRC. The Examiner also concluded that Visayan violated Sec. 259 of the Tax Code which imposes a 25% surcharge of the franchise taxes remain unpaid for fifteen days and Sec. 2 of Act 465 for not paying additional residence tax. With the Examiner’s report as the basis, the Commissioner of Internal Revenue assessed P2,443.30 as deficiency income tax for 1953 to 1958 plus interest and 50% surcharge, P3,850 as additional residence tax from 1954 to 1959, and P35,419.05 as 25% surcharge for late payment of franchise taxes for the years 1957, 1958, and 1959. Visayan appealed to the CA which sustained the additional residence tax but freed the company from liability for deficiency income tax and the 25% surcharge for late payment of franchise taxes and cited Sec. 8, Act 3499 as basis. ISSUES: 1. Is Visayan Electric Company liable for deficiency income tax on dividends from the stock investment of its employees' reserve fund for pensions? 2. Is it also liable for 25% surcharge on alleged late payment of franchise tax? RULING:1. No. 2. No RATIO: 1. The disputed income are not receipts, revenues or profits of the company. They do not go to the general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees to be distributed among them. Visayan is merely acting, with respect to the reserve fund, as trustee for its employees when it sets aside monthly amounts from its gross operating receipts for that fund. And for tax purposes, the employees’ reserve fund is a separate taxable entity. Visayan then, while retaining legal title and custody over the property, holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the absence of any condition therein which would, in effect, destroy the intention to create a trust. And there is no such condition because nothing in the company’s act suggests that it reserved the power to revoke the fund or appropriate it for itself. The fund may not be diverted for any other purpose and the trust created is irrevocable. Therefore, the CIR misconceived the import of the law when he assessed such dividends as part of the income of the company. But the trust fund is still subject to tax under individuals under Sec. 56 (a) of the Tax Code. But under Sec. 331 of the Tax Code, internal revenue taxes should be assessed within 5 years after the return is filed and since the Company was in good faith and the CIR made the

honest mistake of assessing income tax based on corporate tax and not on income tax, then Sec. 332 applies and thus, the tax on the employees’ reserve fund as individual income tax may still be collected within 10 years. But the 50% surcharge cannot be imposed on Visayan because there was no willful or fraudulent neglect to file a return. 2. Sec. 183 provides that taxes shall be paid within 20 days after the end of each month while the franchise extended to Visayan states that the taxes are due and payable quarterly. The due and payable quarterly in the franchise only indicates the frequency of payment of the franchise tax, that is, every three months. It does not refer to the time limit or the date on which the taxes must be paid. There is no conflict between Sec. 183 and the franchise payment period given to Visayan in the franchise. If there is no period, then Sec. 183 is controlling, which gives the taxed entity 15 days to pay the tax. But where there is a period, then the period is controlling. In this case, Visayan’s franchise indicated that franchise tax shall be due and payable quarterly or every 3 months. Since Sec. 183 grants 20 days after the last day of each quarter and Sec. 259 grants another 15 days grace period after that, before imposing the 25% surcharge, then the period for Visayan to pay the franchise tax is within 20 days after the end of each quarter and if such tax remains unpaid for 15 days after that 20 days, then the 25% surcharge shall be imposed upon them. The tax cannot be immediately demandable at the end of each calendar quarter because the transactions on the last day of the quarter must have to be included in the computation of the taxpayer’s return for each particular quarter. It is well impossible for the taxpayer to add up his income, write down the deductions, and compute the net amount taxable as of the last working hour of the last day of the quarter, and at the same time go to the nearest revenue office, submit the quarterly return and pay the tax.

GONZALES VS THE HEIRS OF THOMAS AND PAULA CRUZ

GR No. 131784 September 16, 1999

FACTS:

On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula Cruz entered into a contract of lease with the defendant, Felix L. Gonzales of a half portion of a land containing an area of 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town, Province of Rizal’ and covered by Transfer Certificate of Title No. 12111. As stipulated therein:

Paragraph 9 - The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.

Under the contract, Gonzales paid the rental fees but did not choose to exercise the option of paying the one million purchase price. A letter was issued by one of the heirs to rescind the said contract following breach and ordered Gonzales to vacate the premises within ten days. Gonzales did no vacate. A few days later Paula Cruz died. A case was launched in Court by the heirs of Paula Cruz.

ISSUE:

How must paragraph nine of the contract be interpreted in enforcing the contract of lease?

RULING:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised. The ninth provision was intended to ensure that respondents would have a valid title over the specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to pay the sums stated in the Contract be enforced within the period stipulated. Verily, the petitioner’s obligation to purchase has not yet ripened and cannot be enforced until and unless respondents can prove their title to the property subject of the Contract. The ninth clause was the condition precedent of the contract.

Respondents cannot rescind the contract, because they have not caused the transfer of the TCT to their names, which is a condition precedent to petitioner’s obligation. This Court has held that “there can be no rescission (or more properly, resolution) of an obligation as yet non-existent, because the suspensive condition has not happened.”

LIM VS. COURT OF APPEALS

G.R. No. 55201, February 3, 1994

FACTS:

The deceased spouses Tan Quico and Josefa Oraa, who both died intestate left 96 hectares of land. The late spouses were survived by four children; Cresencia, Lorenzo, Hermogenes and Elias. Elias died on May 2, 1935. Cresencia died on December 20, 1967. She was survived by her husband, Lim Chay Sing, and children, Mariano, Jaime, Jose Jovita, Anacoreta, Antonietta, Ruben, Benjamin and Rogelio who are now the petitioners in the case at bench.

The Cresencia only reached the second grade of elementary school. She could not read or write in English. On the other hand, Lorenzo is a lawyer and a CPA. Heirs of Cresencia alleged that since the demise of the spouses Tan Quico and Josefa Oraa, the subject properties had been administered by respondent Lorenzo. They claimed that before her death, Cresencia had demanded their partition from Lorenzo. After Cresencia’s death, they likewise clamored for their partition. Their effort proved fruitless.

Respondents Lorenzo and Hermogenes’ unyielding stance against partition is based on various contentions. They cited as evidence the “Deed of Confirmation of Extra Judicial Settlement of the Estate of Tan Quico and Josefa Oraa” and a receipt of payment. Principally, they urge that the properties had already been partitioned, albeit, orally; and during her lifetime, the late Cresencia had sold and conveyed all her interests in said properties to respondent Lorenzo.

ISSE:Whether or not there is error or mistake in the signing of the Deed.

RULING:There is an error in the signing of the Deed.

Article 1332 of the Civil Code provides: “When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.”

In the case at bar, the questioned Deed is written in English, a language not understood by Cresencia an illiterate in the said language. It was prepared by the respondent Lorenzo, a lawyer and CPA. Lorenzo did not cause the notarization of the Deed. Considering these circumstances, the burden was on private respondents to prove that the content of the Deed was explained to the illiterate Cresencia before she signed it. In this regard, the evidence adduced by the respondents failed to discharge their burden.

This substantive law came into being due to the finding of the Code Commission that there is still a fairly large number of illiterates in this country, and documents are usually drawn up in English or Spanish. It is also in accord with our state policy of promoting social justice. It also supplements Article 24 of the Civil Code which calls on court to be vigilant in the protection of the rights of those who are disadvantaged in life.